March witnessed a relentless rise in the gold price, with the precious metal breaking new records on a regular basis to reach an all-time high of $2,280 per fine ounce on 2 April, before pulling back slightly. The 90-day futures market price quoted on 3 April by Investing.com was even higher, briefly touching a level of $2,300 per fine ounce.
Traditionally, an inverse relationship exists between US interest rates and the gold price, which is at play again, with the yield on 10-year US government bonds having dropped by 67 basis points since mid-October last year. Of late, however, this yield has recovered marginally, which makes the continued rise in the gold price even more impressive.
Another reason for the surge in the gold price is heightened geo-political tensions in various parts of the world, including China’s overt hostility towards Taiwan, and North Korea’s incessant testing of nuclear missiles around South Korea and Japan. Furthermore, indications exist that the destructive wars in Ukraine and the Middle East may be prolonged beyond 2024.
To some extent, the sluggishness of the Eurozone economy has also contributed to enhancing the investment attraction of gold. Several high-income countries have yet to fully recover from the Covid pandemic, with real interest rates close to or below zero.
A fourth reason is the sharp increase during the latter part of 2023 in global central bank purchases of gold, as these institutions start diversifying away from forex assets. During the fourth quarter of 2021, total central bank purchases of gold (to shore up official reserves) amounted to 34 tonnes. Two years on, and this demand shot up by almost 700% to a level of 229 tonnes, confirming, once again, gold’s status as a long-term safe haven.
The implications for South Africa of the higher gold price are profound and should not be under-estimated. It comes at a time when the country’s other three key mining sector export earners are battling with lower prices and logistics challenges emanating from Transnet. After a very long absence from the number one spot for sales values of minerals, gold shot past the other three “big guns” in January, regaining top spot and outperforming second-placed coal by R2 billion.
Should the easing of monetary policy in the US occur in June, as is widely expected, the gold price rally could well continue in 2024 and possibly beyond.
In addition to boosting mining sector profits and easing the pressure on the public finances, a higher gold price is more often than not associated with domestic currency strength, which will go a long way towards a further lowering of inflation, and ultimately also lead to a lowering of interest rates.