Interest rates, not the threat of war in Iraq, are the key factor in the recent surge in the gold price, analysts said this week.
”War has nothing to do with the gold price, to be quite honest,” John Clemmow of Investec told the Mail & Guardian.
The price of gold touched $373 an ounce this week, a level not seen since late 1996. Some commentators have pointed to the United States’s ever-louder sabre-rattling threats of war against Saddam Hussein as the reason for the rally in the yellow metal.
Clemmow attributes the rise to real interest rates, which is the nominal, or the quoted, interest rate adjusted for inflation. In South Africa the prime rate stands at 17% and the inflation rate at 14,4%, to yield a real interest rate of 2,6%.
Clemmow points out that real interest rates in the US and parts of Europe are negative — meaning that gold yields relatively higher returns.
In Japan on Tuesday nominal interest rates went into negative territory, creating an anomaly where bank deposits decrease in value.
In an interview with Moneyweb this week, Clemmow also dismissed as ”rubbish” the notion that the London market is bleeding from the expected wounds of an Iraqi war. Over the past two weeks the London Stock Exchange has dipped sharply, with the FTSE 100 index starting on a seven-year low of 3 603 points before plunging further to 3 480.
The negative trend, says Clemmow, is due to a huge sell-off by British life insurance companies, which by law have to maintain certain levels of solvency. Their liabilities had been steadily increasing because of the increased life expectancy of British men, he said, but their asset base has dwindled because of the stock market downturn of the past two years.
The companies are estimated to hold between 70% and 75% of their assets in shares, so they had been forced to sell stocks to maintain their solvency ratios and convert to safe havens such as government bonds and, possibly, gold.
Last Sunday, The Observer reported that British life insurers had dumped shares worth £20-billion over the past 12 months, with the momentum reaching particularly high levels since the start of the year. This rush may have helped gold gain $20 in the past two weeks.
South African gold mining houses, and mining in general, reflect the benefits of the metal’s two-year bull run, despite the pain of the strengthening rand during the past quarter.
A flurry of quarterly results was unleashed this week.
Leading the charge was Harmony, which reported that quarter-on-quarter operating profit fell by 20% from R950-million to R763-million — R150-million of the loss directly attributable to the rand’s appreciation. Despite this, the group managed to deliver 6% growth in quarterly earnings a share, from R2,47 to R2,62.
Gold Fields and Durban Roodepoort Deep were due to report on Thursday, followed by AngloGold’s full-year results on Friday. Next Tuesday empowerment group ArmGold reports on its fortunes.
All the companies are in a closed period and would not comment before the release of their results.
Allan Cooke, a mining analyst at HSBC, confirmed that the rising price of gold and the weakening currency have transformed the fortunes of the local gold mining sector. ”Because of the gold price performance over the past two years there are no marginal mines to talk of any more,” he said.
Cooke also pointed out that the gold price had created scope for new mines to come on stream, while enabling groups like Harmony to dust off projects that had been shelved, such as the R1,27-billion Doornkop South Reef venture in Randfontein, west of Johannesburg. The project has a lifespan of 20 years. At peak production in six years, it
will yield 330 000 ounces a year and create 2 800 jobs.
Harmony will also pursue the Tshepong North project in the Free State at a cost of R280-million through its Freegold joint venture with ArmGold.
The company is also considering five other projects, the largest of which are Rolspruit and Poplar in Evander, Mpumalanga, worth a combined R5-billion. To fund expansion, on Wednesday Harmony successfully placed 8,8-million shares to raise R1-billion in capital. On Thursday the company announced that it had disposed of its 1,9% stake in Placer Dome of Australia to realise R633-million.
AngloGold is expected to provide an update on the largest projects under way: at Moab Khutsong, in Klerksdorp, with a capital expenditure of R3,8-billion, and the R1,3-billion Mponeng.
The expansion is expected to boost South Africa’s flagging status as a supplier of gold. In 2001 the country put 400 tons on a world market that has a demand for 3 500 tons a year, 85% of it for jewellery.
This contrasts sharply with the new metal of choice, platinum, which is trading at $670 an ounce. World platinum demand stands at 200 tons a year, only 40% of which goes to jewellery, with the balance used for high-tech industrial applications.
Cooke says the crucial indicator to watch is the rand price of gold, which helped determine revenue and profit margins.
The price depends on both the exchange rate and the dollar price for gold. The surge in the dollar price for gold has more than compensated for the recently stronger currency.
At Wednesday’s exchange rate of R8,75 a dollar and a gold price of $370, the price of the metal was R104 000 a kilogram. Last year it peaked at R112 000 a kilogram, but Harmony bases its planning on a future figure of R95 000 a kilogram.
Mining groups expect the current dollar price levels of gold to hold, but Clemmow disagrees. He says Investec is expecting a recovery in the second half of the year, which ”should then lead to a recovery in real interest rates and a fall in the gold price”.
Gold, the only metal that is both malleable and ductile, has driven the fortunes of the South African bourse in the past two years.
In 2001 the gold index more than doubled, rising by 109%. Last year it rose by 87%. This helped the index shoot up from below 800 points to its current level of just above 3 000.
But Cooke warned: ”We are unlikely to see such gains in the coming two years.” Having moved $100 from $270 over the period, he said that ”expecting the gold price to rise by another $100 will be asking for too much”.