Gold to the Moon!

Author: Safs Narker, CIO, Vunani Fund Managers

The mention of gold in polite investment circles is a sure-fire way to invoke a plethora of emotional responses.  Depending on who is shouting the loudest at the time, you will almost certainly hear stories of a bygone relic or conspiracy theorists and doomsayers claiming the end is near.  It is no surprise that market commentators are pondering the performance of gold over the past 12 months.

The commodity price has risen more than 30% in dollars over the past year, against the backdrop of increased monetary and fiscal stimuli driving developed market bond yields to multi-decade lows.  Whilst the Covid pandemic has unleashed a tidal wave of government support, perhaps the real economic impact is yet to be felt, in the years ahead.  Central bankers and governments have supplied ample liquidity and consumer support to do their best to ensure that we avoid another depression-like outcome. However, the long-term effects of bloated government balance sheets will require lower interest rates for the foreseeable future.  Perhaps the US 10-year treasury real yield (TIPS) trading at negative levels is an ominous sign of things to come.  It is therefore not surprising that gold is rallying!

South African gold miners seem to have the stars aligned with the weaker currency and higher gold price driving significant revenue growth.  These factors as well as years of cost management have finally paid off with significant free cashflow generation aiding a rapid reduction in debt levels.  At the current rand-gold price, SA gold companies are generating higher free cashflows than most domestic industrial companies!  The sector has delivered stellar returns over the past year, with many commentators wondering if gold has entered a “new phase”.

We would caution any potential investors against chasing the commodity rally.  Trying to predict both commodity and currency movements is a fool’s errand and is bound to end in tears! Despite recent performance, gold shares and gold bullion remain absolute duds over the past 30 years, well behind both equities and bonds.