Following concerns over the state of the world’s economy, gold is attracting interest from investors seeking a safe haven. As the demand surges, the price is also going up.
Gold’s recent upward sprint has seen the yellow metal reach a new high for the year, an 18 percent gain over its year end close and a new one-year high. The yellow metal rose $53.20 an ounce to $1,247.80, the highest price since February 2015 and an 18 per cent jump since the start of 2016.
Among the beneficiaries of the increasing gold price are some of the world’s biggest producers of gold. In South Africa, the price of the precious metal has reached a record high with the price having soared above 19,000 rands. Down under in Australia, the price of gold looks set to reach a record high too. In both of these commodity reliant economies, the record high prices are being caused by two things. The first is the aforementioned uptick in investor demand and the second is the depreciation of both the Australian dollar and the South African rand.
Relief for the Mining Industry
For some of the gold producing countries, the surging price of gold is a welcome relief. In South Africa for instance, the fall in commodity prices, especially of precious metals, over the last few years, has wreaked havoc in the mining industry leading to closing of some mines and layoffs.
It is estimated that in the last three years alone, miners numbering approximately 46,000 have been laid off following the fall in prices of coal, iron ore, platinum and gold. More job losses are expected as mining firms continue to downsize.
It has not been any different in Australia. The struggling mining sector down there has been blamed for a slowdown in economic growth. The only saving grace has been the falling Australian dollar, which has ensured that every US dollar earned from commodities translates into a higher Australian dollar value than at the height of the commodities boom when the Australian dollar had appreciated highly. The fall of the Australian dollar by approximately 30% coupled with the recent surge in gold prices, has thus, mostly been good news for the country’s mining industry.
Mini-boom in Aussie Gold Mining Stocks
In the last few weeks, the price of gold has been flirting with the psychological level of US $1200 per ounce. Coupled with the depreciation of the Australian dollar, a mini-boom is currently being experienced with the stock prices of some of Australia’s gold mining companies. On a day when all indexes were in the red as investors dumped their holdings over concerns in the Chinese economy, gold closed the day in the green.
China is one of the main trading partners with Australia, and any slowdown in the Chinese economy is bound to have a ripple effect on the Australian one. To illustrate how gold weathered the storm that affected every other sector, as the index made up of key bellwether stocks in the Australia stock market saw a fall of 2.8%, the gold index went in the reverse direction shooting up by 7.9 percent.
Among the stocks featured in the gold index include miners. The largest gold producer in Australia, Newcrest Mining, did not only close the day in the green, but actually outperformed the index that day when it rose by 8.2 percent. Since the year began, the stock has risen by 27.5 percent.
There were also other gold stocks in Australia that performed well including Northern Star, which closed the day with an increase of 7.7 percent. Though it closed below the index average, the stock of Evolution Mining rose by 6.4 percent. Also closing above the gold index average was Regis Resources which gained 12.3 percent.
The rise in value of gold stocks has not been limited to Australia and South Africa, though. Gold miners in North America including Barrick Gold and Newmont have also seen an appreciation in their stock price though modest compared to the Australian and South African counterparts. This is due to the fact that the latter’s increase has been largely due to the depreciation of their currencies, which magnifies the proceeds of their gold holdings and revenues.
Gold Exchange Traded Funds
Physical gold and gold stocks are however not the only beneficiaries of the current concerns on the global economy. There has also been a rise in funds flowing into gold exchanged-traded funds. SPDR Gold Trust, which is one of the largest gold exchange-traded funds, recently saw an increase of 4 percent in the funds flowing into it. This is the largest gain in a single week since early 2009.
Besides fears and worries driving the surge in demand for gold, another factor that is contributing to the demand in gold is China. China is in the process of turning the Yuan into a global reserve currency. To achieve that, it needs to raise its level of gold reserves.
Media reports indicate that China’s central bank, the People’s Bank of China, increased its official gold reserves by 580,000 ounces last month. The People’s Bank of China is now understood to be holding a combined total of over 57 million ounces of gold. This is a 0.9 percent rise since December last year.
The increase in China’s gold reserves comes at a time when the foreign reserves have been moving in the opposite direction. In January China’s foreign reserves declined by slightly over 99 billion US dollars. The foreign reserves are now 3.23 trillion US dollars. This low level was last reached in mid 2012. This decline in foreign reserves in the month of January was the second largest drop in recent times. The decline in December by a total of 108 billion US dollars was the biggest.
Some economists and analysts say the reason China is disposing of part of its foreign currency reserves while purchasing the Yuan is to prop up its stock market and strengthen its currency. But as it is selling its US dollar reserves, it is also purchasing gold. This is with a view to making the Chinese Yuan easier to trade and international, besides providing stability to its domestic economy. Selling the US dollar reserves is also part of China’s diversification strategy.
Also in the works is a plan to make the Yuan an international reserve currency in the future joining the league of the Euro, Japanese Yen and the US dollar. For this to happen, China has to increase its gold reserves. At present, the gold reserves held by China are below those of France, Italy, Germany and the US. This gives it a fifth ranking in the world.
In the United States, 72.2 percent of the reserves are held in gold while in Germany it is 66 percent. This contrasts sharply with China where gold comprises only 1.8 percent of the reserves.
As such, China’s hunger for gold is only set to increase as it attempts to raise the reserves to match that of other big economies. It is thus expected to be buying between ten to twenty tonnes of gold every month. This should continue to increase the demand for gold.
There is a lot bullish sentiment among analysts regarding gold’s outlook for 2016 they now see gold prices being favored by a confluence of factors, among them a prevailing sense of risk aversion caused by a negative outlook on the global economy and the continued monetary easing by the ECB and Japan. Some analysts are predicting that gold will break out and restart the bull rally interrupted in 2011.