JOHANNESBURG (miningweekly.com) – The World Gold Council (WGC) believes that an “entirely new class of gold investor” could emerge because of the significant global increase in the interest in gold stocks, following the Brexit vote – the British exit from the European Union (EU).

“As a high-quality, liquid asset, we believe gold will provide investors with a hedge against market uncertainty, as well as economic, political and intervention risk,” states the WGC, adding, however, that there are no precedents for an economic scenario such as Brexit.

However, the council notes that other systemic risk events offer some insight into the role that gold can play in wealth preservation. For example, the value of gold rose by 12% as fears of a widespread meltdown increased during the European sovereign debt crisis of 2010.

“Today’s risks are arguably greater,” states the WGC, adding that this is why the world’s central banks hold so much of their national wealth in gold.

The Bank of England holds the lion’s share of South Africa’s offshore bullion stocks, which, at last count, totalled four-million ounces.

At the end of February, the value of South Africa’s official four-million-ounce reserve was $4.96-billion, or R75-billion, at March 9’s exchange rate of R15.17 to the dollar.

The British Exit
Brexit resulted in a mass exodus of shares held in UK-linked markets and others, owing to market uncertainty and fears of stock depreciation.

UK citizens voted on June 23, with 51.9% in favour of leaving the EU. This led to British Prime Minister (PM) David Cameron’s resignation the following day, which became effective on July 13, when former Home Secretary Theresa May replaced him as PM. Cameron supported the vote to remain in the EU, which led to further economic uncertainties, as his decision was in conflict with the majority vote to leave the EU, which, subsequently, led to the value of the British pound falling to a 31-year low against the dollar.

Stock markets linked to the UK and its economy slumped rapidly, with reports of as much as $2-trillion being withdrawn from stock markets in a day.

However, the Brexit decision has propelled gold to new levels. The commodity regained its reputation as a safe haven asset amid troubled markets and in times of economic uncertainty, as investors flocked to the gold market with a flood of new capital, seeing the commodity make significant gains, as a form of investment insurance.

The gold market received so much interest that stockholdings of gold coins and even gold bars in the UK became unavailable at one stage during the Brexit upheavel, as panicked investors snatched up any form of gold available.

Prior to this recovery, the commodity’s value was trading at lows of about $1 050/oz in January, which reflected the gold price’s downward trend early in the first quarter.

The WGC expects strong and sustained inflows into the gold market, driven by the “staggering” level of protracted uncertainty that investors are facing.

Since Brexit, gold has been trading at more than $1 300/oz, accompanied by low equity markets and a poorly performing sterling price. This places gold at levels of trading not registered since mid-2014.

According to the WGC’s ‘Gold Demand Trends’ report, global gold demand reached 1 290 t in the first quarter of 2016 – a 21% increase, compared with demand in the same period last year – thereby making it the second-best quarter for gold on record. This increase was driven by huge inflows into exchange-traded funds (ETFs), fuelled by investor concerns regarding economic fragility and an uncertain financial landscape.

The council states that inflows into ETFs totalled 364 t in that quarter– the highest level since the first quarter of 2009 – compared with 26 t in the comparative period of 2015. During the first quarter of this year, gold was favoured as a risk diversifier because of the negative interest-rate environment in Europe and Japan, combined with uncertainty over the Chinese economy, the anticipation of slower interest rate hikes in the US and global stock market turmoil, according to the WGC.

The council says gold is fulfilling its “classic role as a safe haven asset” and is performing “exactly as the many investors that bought it in the run-up to the referendum would have hoped”.

The WGC adds that gold-backed ETFs have also been increasing sharply and expects such ETFs to continue trading strongly as retail and institutional investors reallocate funds to gold.

In addition, the buying of gold coins by small retail investors, which rose sharply in the months leading up to the EU vote, is expected to accelerate further. Total demand for gold bars and coins was 254 t in the first quarter, which is marginally higher than demand in the same period last year.

London gold trader Sharps Pixley reported that prior to Brexit, global gold holdings in ETFs reached 2 000 t for the first time since June 2013. This increase represents the biggest one-day gain (on June 23) of the largest gold-backed ETF – SPDR Gold Shares – since 2009, representing growth of 3.02% to 928.72 t.

Gold commentator Tyler Durden calculates the 2 000 t-plus ETF increase as being about twice the size of Switzerland’s gold holdings and one-quarter of the US’s.

GoldMoney VP John Butler says investment demand for gold has been strong, with a significant volume of ETF buyers.

Short-term gold price forecasts have aspirational boosts from Swiss financial services company UBS and Singapore-based Oversea-Chinese Banking Corporation, which are elevating their predictions for gold to $1 400/oz in the foreseeable future.

Dutch State-owned bank ABN Amro also raised its end-of-quarter gold value forecast to $1 425/oz.

Interest Rates
The WGC states that the Bank of England and other central banks are “ready to take whatever action is necessary” to safeguard financial stability, which, in practice, could mean interest rates increasing in parts of the world, signifying another positive move for gold.

Gold is supported by not only market uncertainty but also monetary policy actions. The WGC states that, if central banks are forced to implement supportive measures, there will likely be further extraordinary actions, new rate cuts or delays in planned hikes.

Compounding the situation is “worse-than- expected” US labour market data, with a downgrading in economic growth forecasts for the country in June, which is already delaying expectations of a US federal reserve interest rate hike to the end of this year. Brexit is likely to retard expectations even more, leading to some banks pushing interest rates further into nega- tive territory, thereby increasing the investment challenges for buy and hold investors such as pension funds.

Free Cash Flows
Owing to the spike in gold investment, the companies mining the commodity are set to gain significant momentum on the back of hyped-up demand.

According to ratings agency Moody’s assistant VP analyst Douglas Rowlings, South Africa-headquartered AngloGold Ashanti is set to generate an additional $120-million in free cash flow in the second half of 2016 and Gold Fields an additional $50-million in free cash.

Further, South African gold major Barrick Gold claims it could be debt-free within a decade if the value of gold remains steady or increases further. The miner had about $9-billion in debt in the first quarter of this year, which was down from a peak of $15.8-billion in the second quarter of 2013.

Barrick Gold president Kelvin Dushnisky says the company’s debt could fall to $5-billion in the next couple of years, effectively becoming nill within ten years. He adds, however, that such predictions are gold-price dependent.

Asset management company Schroders fund managers Mark Lacey and James Luke emphasise that gold equities in particular are offering a compelling investment case, with such equities likely to outperform the gold price in the coming years.

The WGC foresees uncertainty in markets providing solid support for gold, while depreciating local currencies provide the benefit of lower operating costs in dollars.

Meanwhile, South Africa – one of the top five gold producers globally and boasting an extensive reserve – stands to capitalise from the headwinds made through the trading of gold bullion.

However, decreased local production in recent years has significantly impeded gains during gold’s current run of high value and demand, thereby blunting any form of significant gain for South African miners.