'Era of uncertainty' sends gold into new bull phase

IF there’s one thing that can be said for gold, it’s that it never wastes a good crisis.

The last time bullion was at current levels was during the Global Financial Crisis (GFC) of 2008. The forces that have drove gold to a two-year high earlier this month, however, are not just those related to the UK’s dramatic decision to exit the European Union (EU) on June 23. Instead, analysts believe Brexit is merely the latest in a series of macro-economic events that are describing a new era of global instability.

Analysts returned to their spreadsheets. Suddenly, and dramatically, there was a real prospect of a sustainable gold price above $1,300/oz – a level where the likes of AngloGold, Harmony and Sibanye Gold become seriously cash generative, even after capital expenditure. Any investor worth her salt knows that when this happens, a company either spends on growth or returns the cash to shareholders.

But analysts believe the current geopolitical uncertainty has been years in the making and extends beyond the gyrations in British politics where, for instance, every major political party has or is facing a leadership contest.

In a report for Noah Capital, analyst René Hochreiter observed that the Brexit fallout is only just beginning and “could last for years” with further departures from the EU likely; at the very least, there would be more instability, he said.

The likelihood of central banks jumping with both feet into gold is serious news as they tend to buy lots of the metal, and hold it; they are not the so-called ‘hot money’ that is chasing short-term returns.

According to the World Gold Council (WGC), central banks added 566 tonnes of gold worth $21bn in 2015 which represented the sixth consecutive year of net purchases. “During the first quarter of 2016, central banks bought 109 tonnes, and we expect total net purchases to range between 400 and 600 tonnes for 2016 as a whole,” the WGC said.

“We believe that the prolonged environment of low or, in many cases, negative interest rates will likely result in structurally higher demand for gold from central banks,” it added.

'Era of uncertainty' sends gold into new bull phase