INTERNATIONAL instability, a strong Australian gold industry and a weak Australian dollar have sparked a a booming international gold rally, with the price jumping from $1770/oz in mid-April to over $2050/oz in June, surpassing the US$1400/oz mark and smashing the AUD$1900/oz record.
According to Perth Mint chief executive Richard Hayes, the destabilising effects of the Trump administration, the Sino-American trade wars and, to some extent Brexit, have led the investment market to the point where gold has re-assumed its historical role as the tangible safe investment.
Toward the end of May and the beginning of June, the US made two key announcements that helped to facilitate the precious metal’s rally.
The first was that the US Federal Reserve signalled it would cut interest rates – some analysts believe by as much as 0.5pc – while six months ago, it indicated it would be increasing them.
Secondly, President Donald Trump toughened up his rhetoric on tariffs, trade wars and immigration with both China and Mexico.
“Both of those things together made the Americans and the American economy take a little bit of a breath, and you saw a flow of money into gold away from more traditional assets over that week period,” Mr Hayes said.
In the case of Mr Trump’s border control program with Mexico, Mr Hayes said that it was a domestically destabilising move.
“Using trade and talks of tariffs to achieve an immigration outcome was pretty unusual, and I think that when he tried to tie immigration to tariff outcomes he spooked quite a number of people, even his most ardent supporters in the States,” he said.
Gold is very much a USD commodity, and the strength of that commodity has been reflected in the strength of the US dollar.
Mr Hayes said it is because there is no viable alternative global currency at the moment.
“If you look at the euro, that’s mired in all sorts of issues, and the pound is under significant pressure at the moment with Brexit, and if you look at the yuan – the Chinese would love the yuan to be the global gold currency – but people are nervous about China,” he said.
“The Chinese have a legal system that is very different to what the West is used to.”
This animosity has been amplified by trade tensions, whether it is China withholding heavy rare earths, or the US blacklisting Huawei.
But the sentiment is changing.
“It’s all around sentiment, it’s all around trade tensions,” Mr Hayes said.
“If you go back to the beginning of the financial crisis and into bank debt, corporate debt and sovereign debt – those issues all still remain.
“When Donald Trump took over, US debt was $18 trillion; it’s now $22.5trillion and they just keep printing money.
“While they keep printing money, it will keep the stock market strong, but ultimately there is a time when somebody has to pay those bills and it will be inflationary.
“It is an arithmetic certainty. It’s not a prediction. It’s an arithmetic certainty.”
Certainty is a word synonymous with gold.
At the top end of town, things are sailing smoothly and with certainty, and the colonisation of the gold industry by giants like Barrick and Newmont Gold Corp have seen synergies and efficiencies which have allowed for gold production at scales never seen before.
However, where gold producers have failed to deliver on the certainty of their production, investors have reacted savagely.
Gascoyne Resources called in administrators from FTI Consulting after the $24.5m it raised failed to bail out its Dalgaranga project in WA weeks earlier.
The board and executive announced their resignation, and administrators said that it could take up to six months for the fate of the company to play out.
In the absence of a recapitalisation, Gascoyne’s collapse would wipe the holdings of about 2600 shareholders.
Dacian Gold also had a shaky start to the month, and was shown no quarter after it lowered its guidance for the second time in two months.
Investors were merciless on the former WA darling, with shares plunging 67pc, wiping $241m of value from the company after it cut its guidance from between 50,000-55,000oz to between 36,000-38,000oz and increased the ASIC from between $1050-$1150/oz to $1500-1600/oz.
The miner cited ongoing equipment issues, and performance issues related to labour shortages, as well as the failure of a ball mill that was offline for three days.
However, just weeks later Dacian announced some of the “thickest and highest grade gold mineralisation ever intersected at Westralia” that could keep the company off the chopping block.
“We’ve always had a very weak end at the bottom, and that’s been a feature of the Aussie gold mining industry for decades now,” Mr Richards said.
“We’ve always had these sort of weaker, smaller guys at the bottom who’re either just under capitalised, or having productional grading problems.
“The Aussie gold price has probably kept them afloat for much longer than they would have otherwise.
“What happens is that those resources will be picked up by others, whether it’s because of synergies, or where there are mining techniques, or economies of scale that someone else could bring to bear that the smaller guys just cant.”
Mr Hayes said that the Newmont Gold Corp merger at the beginning of the year has, rather than hinder the struggling bottom end, created a halo effect on the industry.
“In terms of what’s publically available, they would be struggling with or without the mergers at the top end of town,” he said.
And while there are uncertainties from the bottom end, and a lack of significant new finds, this is unlikely to have an effect either way on the gold price.
“I’ve been going to mining and gold conferences for close to 25 years and every year somebody will throw up a graph which shows that three years out there is a big production cliff, and because there’s no big discoveries in three or four years’ time everything is going to fall off the cliff and the production is going to fall from 2800-2900t globally to some much smaller number – and I go back the following year and all that’s happened is that the graph gets moved out by another year, and another and another,” Mr Hayes said.
“Yes, there are no immediate discoveries and they do become increasingly rare, but globally we have mines that are long-life mines that are very productive.”
International instability has historically driven the price of gold up, and the recent rally has been a text book example of this.
As the Trump administration continues to fan the flames of doubt both in the US and abroad, investors continue to take their money out of stocks and bonds that pose the risk of collapse, instead putting it into safe options.
Gold’s tangibility has made it the cornerstone of safe investment portfolios, and with Brexit looming over the European Union and the trade wars showing no sign of abating, Mr Hayes was confident that international tensions will keep gold prices steady.
“My own view is that the price is biased toward the upside,” he said.
“If you look at where the price is now I doubt it will fall back to US$1100 in a couple of months, I doubt it very, very much.”
