Back in January 2020 I told investors I expect the price of gold to hit R26,000 an ounce within mere months. Back then it traded at R23,721 per ounce – having already increased 44% from its 2018 low of R16,000 an ounce.
As we speak the price of gold sits at R31,618 per ounce ($1,725). The rise in the gold price has been both in dollar terms (global factors) as well as in rand terms (local factors).
Three Gold price profit drivers
Gold price driver #1 – Unprecedent global stimulus
World governments and central banks are conducting the largest stimulus programmes EVER seen.
In less than a month the US Federal Reserve Bank has already increased its balance sheet by buying $2 trillion worth of bonds. It’s ‘money printing’ programme is being called QE Infinity (quantitative easing to infinity) because there are apparently NO LIMITS being set to how much stimulus the central bank could provide.
The European Central Bank (ECB) has injected €750 billion – if you’re unsure of the scale of that it is twice South Africa’s annual GDP.
And China has done a number of measures from decreasing bank reserve requirements, to extending credit to business and decreasing interest rates.
Even the South African Reserve Bank, which elected not to buy bonds even in the 2008 financial crisis, is now in the market buying bonds and working to stabilise our currency.
As interest rates in developed countries hit 0% (and even go negative) investors will pile money into gold as the only store of value over the long run.
Gold price driver #2 – Post-Covid inflation
You’d think a lack of demand would cause deflation – and in the short term this is possible. But following worldwide lockdowns the opposite is likely.
You see, there are a number of things that could prove inflationary:
Countries will insource critical manufacturing to avoid long-term dependence on imports
Bankruptcies will leave production gaps that could cause shortages
Long term interest rates will rise – and the increased lending cost combined with necessitated lending during lockdown will raise costs for companies.
Higher inflation, especially when combined with money printing and stimulus (as explained above) will certainly drive the gold price in dollar terms as investors look for a store of long term value.
Gold price driver #3 – The ever-weakening rand
A strong dollar gold price is great – but the rand weakening boosts the rand price of gold even more.
Right now the rand is around R18 to the dollar. With lower interest rates locally coupled with SA’s downgrade to junk status the rand could easily hit R20 to the dollar.
Simply put – further rand weakness is in support of a higher rand gold price – big time.
How I’m playing the higher gold price
The big rise in the gold price has happened – even though there’s still 10 – 20% to go. So if you want to make money from it now you need to invest in something that’s lagged this rise.
I am particularly positive on DRD Gold and Pan African Resources. DRD’s surface operations means it is better able to continue full production even during lockdown.
Pan Af just launched a new project which will add 30,000 ounces of gold production to its bottom line in 2020. At the same time it is paying off debt rapidly – and expanding production at a newly built surface gold treatment plant.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares