Across The Border

Gold sparkles amid global gloom to brighten mining sector

As other assets slump, gold is on a roll, but views are mixed on whether it will hold up amid continuing economic uncertainty

PUBLISHED : Wednesday, 17 February, 2016, 2:15pm
UPDATED : Thursday, 25 February, 2016, 3:21pm

Gold miners have struck it lucky so far this year. With equities and non-gold commodities tanking amid slow global trade and raw materials oversupply, investors have traded risky assets for defensive options, sending the gold price soaring.

Sentiment on Chinese gold related stocks improved considerably when trading resumed after the Lunar New Year, driven by the gold price rally, though they retreated slightly this week when gold weakened after some analysts questioned if the rally could continue.

In Shanghai, Shandong Gold Mining shares soared 32 per cent this month to hit a six-month high of 23.39 yuan (HK$27.94) on Tuesday before dropping to 22.63 yuan at the Wednesday morning close.

In Hong Kong, Zijin Mining is up 27 per cent this month to close at HK$2.19 on Wednesday morning, after hitting a eight-month high of HK$2.36 last Friday.

Their strong performance came as spot gold rallied, hitting a one-year high of US$1,263.48 per ounce on February 11, up 18 per cent for the year. That was a record 44 times the price of oil, according to Deutsche Bank. Bullion brokers GoldCore declared a bull market, and Nomura analysts said US$1,300 was on the cards.

However, the rally retreated this week after the stock market bounced back – minimising the appeal of gold as the traditional safe bet amid a slumping market.

Goldman Sachs released a report on Tuesday saying last week’s rally wasn’t justified. After that, gold dropped 1.5 per cent to US$1,191.02 an ounce on Tuesday before bouncing back to US$1,207.95 at noon Wednesday in Hong Kong. Even with the retreat this week, gold is still up 13 per cent this year and has risen about 7 per cent this month alone.

By contrast, the MSCI World equities index is down 10 per cent year-to-date, while US crude oil has plunged 20 per cent. Fears of a global recession are rising as the global growth outlook deteriorates.

“The market is in full ‘capital preservation’ mode and gold is regaining its appeal as investors shun all but the safest asset classes,” said Simon Colvin, a research analyst at Markit.

The pick-up in gold price and demand, combined with the idea that the commodity may be recession-proof, is a boon for precious metals producers which have struggled for profitability in recent times.

“As gold prices trended lower post-2013, gold miners have focused on cost efficiency and capex cuts to maintain margins and service debt,” Nomura analysts wrote last month. “To achieve a lower cost profile, many gold miners have opted to mine higher grade reserves at the expense of shortening average reserve life of the industry.”

Being a long-term business – it can take over a decade to develop a mine to production – it isn’t easy for mining companies to respond to immediate market conditions. But prolonged high prices would provide welcome breathing space.

The market is in full ‘capital preservation’ mode and gold is regaining its appeal as investors shun all but the safest asset classes
Simon Colvin, Markit

Gold’s lustre could be further enhanced by moves to mitigate the downturn, like US dollar devaluation or the scaling back of planned interest rate rises by the US Federal Open Market Committee, according to JP Morgan senior analyst Marko Kolanovic.

“In an unlikely tail scenario that we see as a temporary loss of confidence in central banks, gold would likely benefit as well,” Kolanovic wrote last week.

While the past 12 months have seen dramatic swings in investor preference, China’s lust for gold has been consistent and increasingly evident over the past five years.

Around 3,000 tons of gold were mined worldwide in 2015. Export data shows around 1,000 tons entered China via Hong Kong, while most of the 500 tons mined domestically stayed in the country.

“China has evolved from being a non-existent global gold buyer to importing the equivalent of 40 per cent of the gold unearthed last year,” John LaForge, co-head of real asset strategy at Wells Fargo, wrote in a note last week.

Since a ban on private ownership of bullion was lifted in 2004, consumer demand has grown, generally peaking around Lunar New Year.

“Now that gold can be bought, we are beginning to see the impact in the consumption data – and it is big,” LaForge wrote.

But analysts agree retail sales figures don’t yet show a consumer gold rush motivated by currency hedging – although extended yuan devaluation and a rising consumer economy could generate that scenario.

For now, the Chinese government is the big buyer, the World Gold Council data shows. The country’s gold reserves grew at a monthly average of 17 tons through the second half of 2015, despite its foreign exchange reserves shrinking by US$512 billion over the year.

Only Russia has been buying gold faster, both countries seeking to diversify their reserves and reduce their exposure to the US dollar amid global economic uncertainty.

Analysts warn the gold rally may only be a short term phenomena. Goldman Sachs analysts say it will sink as far as US$1,000, while others are hedging on whether the metal is a good bet.

“Gold’s strength is probably going to be relatively short term, but there is an upside risk to gold, if the view that China is going to pull the whole world into recession becomes stronger,” Citigroup metals strategist David Wilson said.