Amid global geopolitical uncertainties, concerns about lower economic growth and rising inflation, gold has reinforced its position as a safe-haven asset for investors, and the World Gold Council (WGC) expects at least some of these supportive trends to persist.

Gold prices in South Africa have increased significantly over the past 12 months – “these are good times” from a revenue perspective for South African gold mining companies, says WGC market strategist for Europe, the Middle East and Africa and Asia John Reade.

The gold price reached a near record high of about $2 000/oz in August 2020 and rand gold prices have touched record levels of about R1.3-million a kilogram – with the gold market having flourished, owing to two primary drivers from a supply and demand perspective.

Firstly, central bank purchases accelerated significantly in 2022, reaching about 1 079 t of gold bought for the year. Reade says strong buying from central banks has continued into 2023, describing it as the “standout” positive factor in the gold market over the past nine months.

Secondly, retail demand for gold bars and coins remains strong, which has been a feature of the gold market since 2020.

Other aspects of the market are “in good shape, but not outstanding”, says Reade, who notes that gold jewellery demand is particularly price sensitive, especially in India and the Middle East, which are large jewellery markets.

External market factors have also driven demand, whereby banking failures in the US have made investors hesitant about holding deposits in financial institutions, thus triggering a speculatory investment interest in gold by some investors.

In addition, the anticipation of a potential failure to negotiate a debt ceiling agreement in the US, and the monetary policy decisions taken by the US Federal Reserve, have also driven increased investment in gold.

“We have been surprised by the ongoing strength of the US economy, although we have not been as surprised by the persistence of stubbornly high inflation.

“Inflation has been expected to come down by central banks way too quickly around the world,” Reade argues, noting that upside inflation has unexpectedly occurred in many markets.

As a result, tighter monetary policies are likely going to have to continue for longer than anticipated, which has become one of the biggest economic uncertainties in the gold market.

Hence, Reade expects the main market driver over the next year to be based on the performance of the global economy, noting that a recession could be imminent, amid a banking crisis facing the US Federal Reserve and other central banks, which, in turn, could trigger the end of interest rate hikes.

Interestingly, professional services firm PwC’s twentieth yearly mine report – titled ‘2023 Mine: The Era of Reinvention’, released in June – also showed that gold topped exploration spending globally in 2022. This, notwithstanding the strong drive by miners and governments alike to secure critical mineral supplies.

Interest Rate Outlook

Interest rate cuts are expected to come to the fore by the end of 2023 or by the start of 2024 for the US market, as inflation anxiety starts to give way to worries over what the steep interest-rate increases may imply for growth.

Reade anticipates that the US economy could be affected by a pricing in of rapid interest rate cuts, which could weaken the dollar. This, in turn, would result in favourable conditions for the dollar gold price, owing to a weaker US dollar interest rate-cutting environment being positive for gold.

“How the global economy develops, particularly in the US, is going to have a major impact as a driver of gold going forward and, generally speaking, interest rate cuts are usually favourable towards the outlook for the gold price.”

Gold Fields corporate affairs VP Sven Lunsche adds that, while interest rates have been rising, the market has discounted this to some extent, given that the strong US dollar has not had as much of an impact on the gold price as was anticipated.

As a result of a slowdown in US interest rate increases, and a more stable US dollar, he predicts a “neutral” outlook in terms of the US economic impact on the gold price, while strong demand for the metal is expected to continue from central banks.

“Gold has reaffirmed itself as a safe haven asset investment. Increasing demand by central banks, the US economic environment and various geopolitical factors, particularly the war in Ukraine, have combined to create a favourable environment for the gold price,” he contends.

Despite the major impact of central banks on the gold price, Lunsche and Reade agree that South Africa is not a big enough player in the central bank arena to make a difference in the gold market.

Impact on Local Miners

Strong rand gold prices, which have breached the R1-million-a-kilogram watermark in recent times, have been positive for domestic miners and recent political and economic developments suggest that the rand could remain under pressure even if the dollar gold price remains stable.

Such a prognosis is positive for domestic gold miners overall, but also comes with drawbacks, with miners still heavily reliant on imported equipment.

There are also other country-specific issues, such as loadshedding, which are impacting on the ability of local mines to produce gold, with Reade arguing that energy constraints and a weakening rand are affecting the country’s economic performance and outlook.

Additionally, with the increasing costs of water and electricity, and an overall 12% mining cost increase in 2022, Lunsche laments that South African gold miners have not been able to take full advantage of the lower rand gold price.

The rise in electricity prices for large industrial users since 2008 has made it difficult to economically extract gold at marginal prices, adds Minerals Council South Africa economist André Lourens, noting that this has resulted in the premature downsizing of production to focus on higher-grade areas of mines or shutting operations down.

“The result is that gold mining has become expensive and complex. The remaining gold grade in the reefs is lower and the costs involved to mine and refine gold are much higher with operations becoming more capital intensive,” he says.

Lourens adds that gold mining is mostly in decline, owing to challenging operating conditions as a result of the depth of mines and high labour costs which have contributed to reducing margins, which is exacerbated by insecure power supplies and load curtailment enforced by State- owned utility Eskom.

He notes that gold mines in South Africa are among the deepest in the world, which makes competing against other jurisdictions such as Ghana, the US or Canada increasingly difficult, adding that gold mines of this depth cannot operate without electricity for their auxiliary systems such as cooling and pumping water.

Therefore, despite signs that short-term production is slightly improving, Lourens notes that the long-term trend of gold production in South Africa is a downward one, with the country having yet to recover to prepandemic average levels of production.

Lourens contends that the gold industry is no longer the main driver of employment in the mining sector, noting the natural deterioration, owing to factors such as lower grades, higher costs and complexity.

He explains that when looking at production index data, with the price per ounce of gold overlaid, it shows how the levels of production often seem to respond to changes in prices.

“Although this is not always the case, the industry cannot immediately respond to increases in prices with increases in production, especially given the structural constraints it faces, such as electricity supply.”

Another factor constraining any significant rise in domestic production is geological.

“We haven’t seen any openpit or shallow reserves coming to the fore, so we have to go deeper to get more gold and that comes with a huge amount of costs and it comes with concerns for the safety of our people,” Lunsche explains.

For Gold Fields, that has resulted in it focusing on technology at the South Deep gold mine, in South Africa’s Gauteng province, which Lunsche says remains on course to be steadily ramped up to produce 380 000 oz/y by 2026.

Hence, the miner has no intention to pursue other domestic prospects, but rather plans to focus on South Deep to steadily increase its domestic gold production.

“We have no plans to increase exploration in other areas in South Africa, given our significant investment in South Deep.

“South Deep is doing well and we will increase production to its current peak outlook. At that level, and if the rand gold price remains stable, we will ensure strong returns for our shareholders,” Lunsche adds.

To remain resilient despite market changes, Gold Fields has implemented strategies to ensure that its mines remain profitable at all-inclusive sustaining costs that are significantly lower than the current market price of gold.

Moreover, Gold Fields only exploits gold reserves that can be mined above the cut-off grade of $1 400/oz to retain a good profit margin. In addition, it does not engage in hedging.

Reade believes hedging should be considered only on a case-by-case basis, including, for example, the development of a project, noting that investors expect to receive exposure to a rising gold price and are often opposed to long-term hedging programmes.

“Before committing to that sort of expenditure for a mine that is marginally profitable, it makes sense to lock in a feasible gold price so that you know that the investment you are going to make in stripping waste rock will be paid back by mining gold-bearing rock,” says Reade.

However, with the various unexpected crises that have taken place globally, gold has helped to protect investor portfolios by adding to the risk-adjusted return of a portfolio over time.

“We hope to see more investors recognising the benefits of owning gold, and I would expect to see more investment in gold going forward, particularly as a result of the performance over the past few years,” Reade concludes.