Inflation fears should have inspired a run on gold, but the asset may have lost its relevance. (Andrey Rudakov/Bloomberg via Getty Images)
In the last week of January, when the Covid-19 pandemic began to affect the world, gold prices hit a three-week high. The dizzying climb of the precious metal has not abated since then, with numerous gold mines making a better profit than in previous years.
Within that week in January, gold was up 0.4%, trading at $1 572 an ounce.
Lester Davids, the trading desk analyst at Unum Capital, said the pandemic has created a risk-off sentiment — investors are gravitating towards lower-risk investments such as gold.
Since January, the gold price has gone up by at least 25%, peaking in August at an unprecedented price of more than $2 000 an ounce, leaving companies with increased cash flows that they used to pay shareholders.
A report compiled by Momentum Investments explains that, from an investment perspective, the metal is an unusual asset. It generates no income and has little use value. But its ability to act as a store of value has always attracted investors, particularly in times of crisis.
The rush for certainty has resulted in gold producers such as DRDGold, AshantiGold and Harmony Gold making millions during the pandemic. According to DRDGold’s annual financial statement, revenue for the group increased by 56% to R4.2-billion during this year. The company said it was able to reach this level because the substantial increase in the gold price.
The company said the average price of gold increased by 33% from R577 483 a kilogramme in 2019 to R768 675/kg during the year. As a result profit before tax for the year increased from R105.1-million in 2019 to R978.9-million in 2020. The company accumulated a cash flow of R926.4-million.
After declaring interim dividends during the financial year of 50 cents a share, DRDGold declared a final dividend of 35 cents a share. This is the 13th consecutive financial year the company has been able to pay dividends. This year its shareholders were paid 85 cents a share, four times the dividend declared for the financial year ended 30 June 2019. In addition to this, DRDGold’s market capitalisation has increased by 528% year on year.
“We are therefore truly thrilled that our company’s shareholders not only earned substantially increased cash returns but also benefited from exceptional capital growth,” the company said in its financial statements.
Last week, AngloGold Ashanti said it received a near fourfold increase in cash flow in the third quarter of 2020 to $339-million — a 290% increase from the 87% made in the same period last year.
With this increase in fortunes, the company will pay its shareholders 20% of its free cash flow before accounting for capital expenditure in growth projects, up from 10% previously. It will further double its payouts from the current annual dividend to semi-annual payments.
This comes after it completed the sale of its South African operating assets on 30 September this year to Harmony Gold. The company said the profits made this year were not tied to the $200-million deal with Harmony Gold.
In their financial statement update for the three months ending on 30 September 2020, Harmony Gold said that its operating free cash flow almost tripled quarter-on-quarter to R1.8-billion, compared to R603-million in the previous quarter. This was due to higher production and a 5.4% increase in the price of gold to R922 398 per kilogram. The company’s operating free cash flow margin doubled in the same period, from 10% to 20%.
Its quarter-on-quarter production increased by 38% from 7 049 a kilogram to 9 758 a kilogram.
Sonja Saunderson, the chief investment officer at Momentum Investments, said gold was a go-to even before the pandemic. This was caused by trade tensions between the United States and China. Covid-19 has made gold more attractive.
Saunderson said the US’s real yields are low and typically that is good for gold. This is because it is relatively expensive to hold gold in a portfolio when real interest rates are high, and relatively cheap when real interest rates are low.
Saunderson said that according to their calculations, gold has outperformed the local equity markets in the first three months of this year by 60%.
Gold acted as a haven during the 2008 financial crisis. In the first quarter of that year, it rose to $1 000 an ounce. But in the subsequent quarter, its fell to $692.50 an ounce.
Rob Pietropaolo, the head of trading at Unum Capital, said gold is also a safeguard against inflation.
Interest rates discouraged investors from holding cash and instead to use gold as a buffer against the effects of inflation.
“Peak inflation back in 2008 hit 17-year highs. Add to that, a financial meltdown, you have a perfect storm for gold which then started to fall as the crisis eased and the global economy reset,” he said.
This year, gold started its slow decline in August because of the delayed announcement of further stimulus from the US. “Further stimulus announcements are expected to weaken the dollar further and create further inflationary pressures which theoretically is positive for gold,” said Pietropaolo.
Seleho Tsatsi, an investment analyst at Anchor, said the longer there is a Covid-19 pandemic and there is no vaccine, gold will continue to do well.
Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian
DRDGold says it is cleaning up its act
DRDGold specialises in remining gold tailings. The company has previously been accused of violating environmental laws, but seems to have mended its ways.
In 2015, the Centre for Environmental Rights (CER) looked into companies listed on the JSE that were transgressing environmental laws. CER found that DRDGold was guilty of frequent breaches of laws and permits. This included spills and water pollution caused by burst pipes, breaches and overflows of tailings dams; violation of dust emission levels; conducting operations without water use licences; and failures to rehabilitate environmental damage under legal obligations.
But the company seems to be improving the way it handles the environment. In its financial statement released this year, DRDGold said it has shifted from deep-level underground mining to the large scale retirement of mine dumps and tailings.
“We have developed over time both the skill set and the system that enables us to do this profitably and sustainably,” it said.
The company’s chairperson, Geoffrey Campbell, said the application of smart technology will provide them with the means to extract gold efficiently, which will extend the mine’s life and result in more profits and a cleaner environment.
DRDGold has spent more than R270-million on rehabilitation activities (including controlling dust) in the five years preceding the 2020 financial year.
AshantiGold and Harmony Gold have also previously been found guilty of similar issues according to the CER’s research.
According to the CER report, Harmony Gold was found to have had “multiple” unlawful discharges and ongoing excessive dust emissions.