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'Fiscal cliff' deal may affect SA

Chantelle Benjamin, Lisa Steyn

A higher gold price is unlikely to offset the effects of cautious American consumers and a weaker rand.

With the dollar under pressure, gold gains currency. (Reuters)

South African economists are encouraged by the last-minute deal this week by the United States government to avert the fiscal cliff but they warned that it's a short-term solution and that the real impact on South Africa will be seen only in two months' time.

The deal on January 1 averted the spending cuts and tax increases that were likely to push the US back into recession, which would have had serious global implications. Instead, the Congress voted for a White House proposal that will see tax increases for high-income earners and spare the middle- and lower-income sectors.

But the key decisions on spending cuts and the debt ceiling has been delayed until March 1, and South African economists and analysts say this will be the real test for the US, which is close to its $16.3-trillion borrowing ceiling.

Ironically, the uncertainty could have a short-term benefit for gold-producing countries such as South Africa. The metal rose to a two-week high on Wednesday following news of the deal.

A rally in the equities market is also expected, although one analyst warned that the tax cuts, although affecting only a small percentage of the population, could have a slightly negative effect on South Africa, because US consumers could become cautious about spending.

Global and some local commentators said this week the US's inability to reach a deal that addressed the budget deficit could see a rally for gold over the coming weeks, as people look for certainty.

Protection against inflation
Chris Hart, chief economist at Investment Solutions, said the US deal did not address the urgent need to cut expenditure and the deficit was expected to widen.

"There is often a relationship between the dollar and the gold price. Gold offers protection against inflation and systemic risk. The dollar also fulfills that role but, when the dollar [is] being debased, gold benefits," said Hart.

In 2012, with the eurozone still facing a sovereign debt crisis and the so-called fiscal cliff looming over the US, governments, especially those of emerging economies such as China, Russia and Brazil, continued to increase reserves of the precious metal.

Some analysts believe that gold may also attract speculative buying if it breaks through the present high. It ended a little softer in the last quarter of 2012 because of concerns about its ability to retain traction.

Based on gold's performance so far, global financial services firm Morgan Stanley expects the metal to be among the top-performing commodities in 2013 and is its "preferred fundamental metal exposure", because  the company predicts there will be more quantitative easing in the US and Europe.

Defensive posture
The global investment banking firm, Goldman Sachs, believes the metal is likely to peak this year before declining in 2014.

According to Reuters, US Bancorp, in its outlook for 2013, said the financial uncertainty warranted a defensive posture.

"We, therefore, think gold and platinum are an outright buy at present levels as both metals have very low supply elasticity and are key beneficiaries to loose monetary policy."

The bank said it expected gold to reach $1 950 an ounce during the next three months and platinum, which closed on January 2 at $1 566, would move to $1800 in the same period.

Edward Meir, a metals analyst at INTL FCStone, a Fortune 500 company, said in a precious metals report: "Whatever happens in Washington, we suspect gold will likely do better over the next few weeks as the colossal failure of political will to get America's fiscal house in order should provide fodder for the gold bugs to bid prices higher, the current slight decline we see notwithstanding."

But a high gold price may not necessarily spell good news for South Africa's gold mining industry if the rand slips, as some analysts have predicted. Hart said a gold price high against a weaker rand would see short-term benefits for gold but would eventually push up costs, a problem already plaguing the local mining industry.

Reasonably hopeful
The best-case scenario for the local industry would be a stable currency, combined with higher precious metal prices. Also good, Hart said, would be if the US could avoid a recession.

The rand also recovered in the first few days of the new year, coinciding with market anxieties over the US deal.

Hart said: "I think it's the weak dollar effect. But it's also about our own internal uncertainty [that] has been largely resolved; people are reasonably hopeful."

The JSE, like global markets, responded well to the news on January 2, passing its 40 000 point barrier to reach 40061.23 points, the highest since December 28 2012, extending a 20% gain made last year. Notable share price increases were seen for Anglo American, BHP Billiton, Exxaro Resources, African Rainbow Minerals, AngloGold Ashanti and Gold Fields.

Global markets opened on January 3 a little weaker, with analysts saying that the looming budget fight was responsible.

Annabel Bishop, group economist for Investec, said South Africa was unlikely to see a real benefit from the US deal in the next two months. "If anything, it might have a slightly negative impact on South Africa. While tax cuts are levelled at the very wealthy, spending by the US consumer may reduce."

Bishop, like other analysts, was concerned about the impact further spending cuts, expected in March, would have on South Africa. "I expect that one of the outcomes of this deal is that we will see a rally on equity markets," she said.


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