Glittering Performance

By: Nelendhre Moodley

Global economic challenges and uncertainty saw gold deliver a sterling performance in 2019. SA Mining caught up with John Mulligan, a director at the World Gold Council, to chat about gold’s performance in 2019 and the outlook for 2020.

How did gold perform in 2019?

The gold price up to the end of November at 1 456 US$/oz rose 14.5% in 2019. But if we look at gold in other currencies, a wide range of countries have experienced gold prices at or near record highs. And gold is still relatively strong – that is, outperforming the US$ price – in euros, Indian rupees, Chinese renminbi, Turkish lira, South African rand and the Australian dollar.

A relatively strong gold price and weaker local currencies have helped miners in many countries and contributed to healthy margins and cash flow.

The major movement in the gold price occurred in the summer when it broke out of an extended period of sideways trading, between US$1 150 and US$1 350/oz, to rise to its current range of between $1 450 and $1 500/oz.

This was driven, to a large extent, by investor interest in gold and a return to the gold market of US investors, who for several years have largely neglected gold.

This explained the rise in gold ETF buying – a whopping 260 tonnes in Q3 of 2019. Gold-backed ETF holdings recently reached record assets under management in volume terms, of 2 900 tonnes.

The other major story shaping demand was the continued very strong buying of central banks – having purchased around 590 tonnes year to date – reflecting a sustained trend of strong monthly purchasing.

This was driven by the ongoing need of central banks to further stabilise and protect official reserves against an increasingly vulnerable global outlook and, in many instances, policies to further diversify away from US dollar holdings.

On the flip side, elevated or record local prices and a backdrop of economic and geo-political uncertainties – for example reflected in the trade tensions and tariffs – have caused consumers to question their spending power and hold back from purchasing.

Consumer demand for gold in Q3 was therefore particularly weak.

What is the outlook for gold in 2020 and what will drive this performance?

The initial months of 2020 are likely to be a continuation of the trends over the last quarter of 2019.

We may, however, also see stronger private investor demand for gold bars and coins.

This has been particularly weak in recent quarters, dampened by uncertainty over local price trends.

But some of these factors are temporary and the heightened risk awareness that has caused institutional investors to return to gold may filter through to individuals and private wealth managers as they seek protection and stability.

How did the downstream gold sector perform in 2019?

The year overall was relatively stable but there was a significant shift in the sources of downstream demand.

Consumer demand for both gold jewellery and bar and coins in the early part of the year were healthy but not particularly strong.

As stated earlier, the price rise in summer, combined with local currency weakness and lower consumer confidence, dampened that demand as the year progressed, but professional investor interest then surged as gold in the ETF vaults rose.

And central bank buying was strong across the year.

Combined, this has resulted in overall levels of demand being comparable with recent trends, even if the drivers of that demand shifted in H2.

What new initiatives are on the cards from the WGC?

We are constantly engaged in working to ensure the overall market infrastructure for gold is a fair and efficient gold market.

You are therefore likely to see a number of initiatives over the next year or so focusing on these issues – that is, how gold is accessed and traded and the policies shaping these activities, to ensure the market is fit for purpose for the broadest set of participants and investors.

Recently, we’ve launched the Responsible Gold Mining Principles and will be striving to ensure those gold mining companies and their investors and wider stakeholders understand what defines responsible gold mining practices and how this can be clearly demonstrated now and in the future.

We’ve also recently launched the latest stage in our work on gold and climate change and will continue to strive to ensure all gold supply chain and participants are aware of the opportunities for the sector to decarbonise and gold’s potential benefits as a climate-risk mitigation asset.

And finally, our research outputs and data sets have recently been enhanced – they’re now all accessible via our Goldhub platform.

We also launched the first version of an exciting new tool – the Gold Valuation Framework – which should allow sophisticated investors and analysts to arrive at rational risk-return expectations for gold based on both macro-economic scenarios and supply and demand factors.

What have been the global production trends over the past five years?

Global gold production has been inching higher for quite a few years now – and current annual production levels are 9% higher than they were five years ago.

South Africa’s production, however, has been in reverse and steadily declining – it is now 23% lower than it was five years ago (and 38% lower than in 2010).

In 2018, SA ceased to be the leading African producer, with Ghana now the largest regional producer.

How is Africa faring as a gold-producing destination? Which areas have become key emerging markets in Africa?

Wider African gold production (beyond SA) has been far more robust, with strong growth over the past five years across the continent.

Ghana, Sudan, Mali, Burkina Faso, the Democratic Republic of the Congo, Zimbabwe, Ivory Coast, Senegal, Nigeria and Gabon have all reported annual production growth (over the past five years) of well over 20%.

These countries remain the sites of current focus and activity for many gold miners and their investors.

Gold mining, if it can flourish in a relatively stable and sustainable fashion, can have a significant beneficial impact on the socio-economic development of these countries.

Some of this production will, however, be small-scale and artisanal in nature and there are clearly often many social and environmental challenges with such informal production, although it is also likely to be a substantial source of regional employment.

But generally the development of gold mining across the African continent has been strong – five-year growth in regional gold production of 20% and 10-year growth of 41%.

What challenges has the sector experienced? Why is this?

Gold mining is increasingly being shaped by a number of factors, many of them reflective of broader social and environmental trends.

Gold miners increasingly need to be able to clearly demonstrate responsible practices and their ability to deliver social value in addition to delivering solid returns to investors.

The expanded geographic diversity of operations across the globe has also diversified the range and nature of the demands of host nations and communities on the mining sector.

Gold mining companies now need to be far more sensitive and responsive to these local factors.

Additionally, the funding base for gold mining has changed over the past decade, with a rise in passive funds and with far fewer active funds providing equity financing.

The industry is still seeking how to recover its appeal to the generalist investor and compete on equal terms with other sectors and asset types.

This challenge may require the gold mining sector to change how it communicates its wider strategic value.

Investors are now applying far stricter criteria to how they evaluate and select assets, integrating ESG (environmental, social and governance) considerations into their thinking, and gold mining needs to be able to adapt accordingly.

But this may represent a major chance for the industry; if it can show leadership and demonstrate its high standards and wider socio-economic contributions, it may also be able to attract a new set of investors, helping compensate for those that have disregarded or turned away from the sector over the past decade.

The gold mining sector is, fortunately, now also embracing new technology with enthusiasm and what may have looked like a very substantial challenge a few years ago – to modernise the industry and transform a complex set of physical operations and analytical processes – is increasingly being grasped as an opportunity.

This should, ultimately, lead to a far cleaner, safer, more efficient industry.