HILTON DAVIES It will not be too many years into the future when it will become difficult to satisfy investment gold demand in South Africa
In the first quarter (Q1) of 2020, South Africa was subjected to a sovereign debt rating downgrade by ratings agency Moody’s, SA Bullion MD and analyst Hilton Davies notes.
In the ‘SA Bullion Q1’ report, released in April, he highlights that the downgrade was expected and, therefore, largely priced in, but the effect of South Africa’s expulsion from the World Government Bond Index is hurting the rand and will continue to do so for a long time, as foreign investment managers are forced to liquidate South African bonds and repatriate capital.
“A significant driver of the Moody’s downgrade was its forecast on South African economic growth. It forecast annualised rates of contraction for Q1 at -4% and Q2 at -8%, with a year-long forecast of -5%.
“Of course much of this severity can be laid at the feet of the Covid-19 pandemic, but tragically, South Africa is coming off a dreadful base into this storm,” he explains.
Davies also highlights that the national debt to gross domestic product ratio has worsened from 30% to 60% since 2008, owing to the previous administration.
“And now, it will get a lot worse in the next ten years. A ratio at 80% is baked in.”
He adds that “about the only piece of good news for South Africa in recent times has been the Russia/Saudi oil war”.
Although it helped precipitate a stock market plunge, he points out that a much lower oil price for a net importer, such as South Africa, is great news.
However, an eventual reversal will not be pleasant, as inflation will balloon upward and the rand will deteriorate further at that time.
“The Moody’s downgrade, the immediate impact of the State lockdown and the foreshadowing in terms of the impact of Covid-19 on times to come, have left the rand reeling. The rand lost 22% of its value in Q1.”
Further, in the days following the quarter’s end, the rand lost more substantial value.
In SA Bullion’s view, the market is experiencing a “synthetic short” on the dollar. As such, this type of action follows a global crisis that sets off a flight to the dollar, particularly from emerging markets, leaving a worldwide shortage of dollars.
At that point, the report states, lenders will be unwilling to part with dollars, the price of dollars will rocket and local currencies will plummet.
It will take intervention by the International Monetary Fund and World Bank to reverse the rot, says Davies.
“In the meantime, the course of action is clear: get out of the rand and get into gold for the double benefit of attaining physical gold exposure that is priced in dollars.”
Moreover, Davies tells Mining Weekly that South Africa’s gold mining industry has suffered from years of government hostility and is in its sunset years.
“In the past ten years, total production has fallen from 197 t/y to 90 t/y,” he underscores, and concludes that it will not be too many years into the future when it will become difficult to satisfy investment gold demand in South Africa.