Gold miners shine as bullion pushes to a five-year high

The JSE’s gold index jumped as much as 6% on Thursday, stretching its year-to-date gain to 40%, as dovish US Federal Reserve commentary drove the price of the precious metal to a five-year high.

Gold surged as markets priced in a 100% chance of the Fed cutting interest rates by the end of July, with analysts saying the metal could reach $1,400/oz by the end of this week, further boosted by rising tension in the Middle East. Loose monetary policy tends to boost gold, as the precious metal is seen as a hedge against inflation, which usually rises as interest rates fall.

A rally in the gold price since the end of May has helped ensure gold miners are the second-best performing index on the JSE, after platinum miners.

Gold miners have added about 39% so far in 2019, and should they hold onto these gains it will have the best year since 2005. The all share has risen 12%, while platinum miners have gained 60%.

The winning streak for local JSE-listed mining stocks is unlikely to last, with production steadily falling as the sector grapples with myriad problems, including militant trade unions and unreliable energy supply, said Mergence Corporate Solutions director mining Peter Major. Complex and uneconomic policy and legislation, as well as criminal syndicates and illegal mining, were also issues, he said.

“Most foreign jurisdictions were unfortunately far more attractive for gold mine investment, an issue underscored by how Ghana recently overtook SA as the biggest gold producer in Africa,’’ he said. 

“There is little in the current SA environment or legislation that makes it easier or more profitable to mine gold here, but there are a thousand things making it more difficult.”

The recent outperformance of local gold miners is unlikely to last.

“These shares will inevitably start levelling off and dropping back even if gold stays strong — because of all these difficult elements,” said Major. 

The precious metal has rallied since late May due to safe-haven interest, as the US-China trade dispute takes its toll on global sentiment. Tension in the Middle East has also boosted interest in safer assets, with reports suggesting Iran shot down a US drone over the Persian Gulf in international airspace.

A firmer rand, however, has taken the edge off mining stocks a little, with the rand having strengthened 3.66% so far against the dollar this week.

Technical indicators point to gold reaching $1,400/oz by the end of the week. 

Markets are still viewing the prospect of a military escalation in the Middle East as unlikely, but this could shift if there are further developments, said Stephen Innes, managing partner at Singapore-based Vanguard Markets. Though the US is cutting rates, the relative strength of the US economy means this is likely to benefit equities more than gold, he said.

Much now depends on the outcome of the meeting between US President Donald Trump and Chinese President Xi Jinping next week, but assuming there is no escalation in the trade war, gold is likely to come under some pressure, Innes said.

gernetzkyk@businesslive.co.za