By Rob Spanjaard, Director at REZCO Asset Management
Whether or not to invest in gold is an enduring investment debate. In our view, gold as an investment class is losing its shine. Historically, gold miners in South Africa were in a favourable position: South Africa was the biggest exporter of gold in the world.
This is no longer the case.
South African mines exported close to 1 000 metric tons of gold in 1970. Today, South Africa exports less than 200 metric tons of gold and is currently ranked only the sixth biggest exporter of gold in the world, after China, Australia, the United States, Russia and Peru.
The fact that gold miners in South Africa now have to mine deeper and have substantial rising input costs has impacted negatively on the companies in the industry and will have long-term negative effects on their bottom lines.
Gold has been a big momentum play for the last number of years and many investors have been getting on to the ‘gold band wagon’ for this very reason. In short, investors have been buying gold because it has been going up. These same investors may become sellers because gold has fallen recently.
Traditionally, gold was used as a safe haven asset class but, in our opinion, this is not a valid reason to hold gold. While it is true that the gold price could not go to zero, it is also quite able to halve in value. In truth it is not true that gold is a low risk asset class. For example the price of gold has slumped by 28 per cent last year. The large amount of gold held by investors above ground increases this instability.
Because gold miners have no control of their selling price, their profit margins are heavily affected by their input costs. An increase in their input costs, in the form of an increase in labour costs and electricity costs, has a negative effect on their profits.
Today, South African gold miners also have to go a lot deeper to get to the gold, and this has had a further negative effect on their costs.
In addition, the government is not doing the mining industry any favours per se. Relationships between the government and the mining industry continue to be strained and are not contributing to creating an investor-friendly environment in the mining industry.
We do not view gold as a hedge against inflation. In an environment with moderate inflation, gold doesn’t act as an asset class of choice against rising prices.
Historically, the correlation between the increase in inflation and the price of gold has not been substantial. In periods when there has been a positive correlation, these were short-lived.
The gold price increased from $ 274/oz in 2001 to $1900/oz in 2011, during a time of low inflation. If hyper-inflation such as occurred in Zimbabwe should happen, gold would hold some value.
However, against a depreciating Rand, we do see gold as an effective hedge, as the price of gold is priced in US Dollars, offering South African investors an increase in their Rand returns should they hold this asset class. However, platinum and palladium would probably be better investments.