By Nick Way
All the market chatter might be about strategic minerals, but gold is still pulling its weight.
The raw numbers tell the story. Australia, boasting the world’s largest-known gold reserves at 21 per cent, generated $24 billion in gold exports in 2022 – making it our fifth-biggest export earner. Production is rising, with more than 80 operating gold projects (with one or more mines) accounting for nine per cent of global production. While much of the market chatter is about strategic minerals – notably lithium – gold remains a vital player in our economy.
Its critical role, especially in Western Australia, is not about to change if the World Gold Council’s (WGC’s) predictions for gold demand are in the ballpark. As noted in WGC’s half-yearly report, the gold price rose 5.4 per cent in US dollar terms in the first half of the year, closing at 30 June 2023 at US$1912.25 per ounce. WGC expects demand to remain buoyant in the second half for three key reasons: a relatively stable US dollar and interest rates, geopolitical risk, and central bank demand.
It is the latter that is exciting the gold bugs. Central banks are buying gold at ‘extraordinary levels’, with the WGC noting that they acquired 228 tonnes in the March 2023 quarter (perhaps significantly, this period overlapped with the US banking crisis), with Singapore and China heading the pack. And it followed a record 2022, when central banks added 1078 tonnes to their reserves.
Central banks have been attracted to gold since the global financial crisis because they expect this precious metal to hold its value in turbulent times and, unlike currencies and bonds, it does not rely on any issuer or government. It also enables diversification.
WGC Head of Asia-Pacific and Director of Central Banks Shaokai Fan says that although the banks have been net buyers for about 13 or 14 years, this grew exponentially in the past five quarters to 31 March 2023. ‘Geopolitical risks and sanctions against Russia have livened up central banks to the importance of maintaining gold holdings,’ Fan says.
‘When sanctions were announced against the Bank of Russia last year, it was the first time that a major large central bank was sanctioned in this way. And I think it made many central banks consider how to calculate political risk, with the next question being “How can you mitigate against this type of political risk?” I think that the overall environment for risk and, specifically, geopolitical risk, is underscoring the need for gold among central banks.’
It’s not just central bank buying, important as that is – the WGC expects the Indian economy to hold up and China to respond to a potential economic stimulus later in the year. With these two markets accounting for more than half of global demand for gold jewellery – which, in turn, accounts for about 50 per cent of total gold demand – their importance can hardly be overstated. Certainly, the industry is hoping for sustained demand for jewellery post COVID, although a Chinese economy that fails to pick up will mean lower consumer appetite for gold, with much depending on how much Beijing is prepared to pump prime its economy.
It’s not just demand for gold jewellery in Asia – in the United States, demand for gold bars and coins has been rising. This is reflecting consumer concerns about the broader economy, while, globally, investment in these physical assets hit 300 tonnes for the third consecutive quarter to 31 March 2023 – the first time this has occurred since 2013. It should be added that a higher gold price will eventually hurt consumer demand.
The demand equation for gold, when coupled with Australia’s vibrant gold mining sector and bountiful reserves, helps explain why there are 218 companies on the gold sub-industry index on the ASX. They range from industry giants such as Newcrest (ASX: NCM) – which had an underlying profit of US$778 million and paid a US$0.55 dividend to 30 June 2023 – to Northern Star Resources (ASX: NST) and a plethora of (hopeful) explorers. These coampnies comprise about eight per cent of the companies listed on the ASX.
All these mining companies are an integral part of an industry that has helped to define this country – and not just commercially. It’s worth remembering that it was the 1850s Victorian gold rush that saw the colonies’ population increase by about 800 per cent and, at the same time, hasten the end of transportation (it officially ended in 1868) as sending convicts to a gold rush hardly seemed a fitting punishment.
Victoria’s new-found wealth also found expression in sport with the first Melbourne Cup in 1861, while many trace our democracy to the 1854 Eureka Stockade – the only armed rebellion in our history. Forty years later, the Western Australian gold rush saw the population increase nearly 500 per cent, as well as helping to get the vote to federate over the line, as many voting were from the eastern states.
Today, the industry is enjoying another growth spurt, although, unlike many sectors of the economy, it wasn’t heavily impacted by COVID-19 in production terms. Western Australia’s decision to shut its borders, in tandem with the federal government decision to make mining an essential industry, brought relative stability to the sector.
The Department of Industry, Science and Resources’ June 2023 Resources and Energy Quarterly is forecasting gold production to rise from 298 tonnes in 2022–23 to 317 tonnes in 2024–25, as significant new projects and mine expansions come online. ‘Production will continue to ramp up for recently started projects, such as Red 5’s (ASX: RED) King of the Hills project, Pantoro’s (ASX: PNR) Norseman project, and Calidus’s (ASX: CAI) Warrawoona project. Bellevue Gold’s (ASX: BGL) 5.7-tonnes-per-year Bellevue gold mine in Western Australia is expected to come online in the second half of 2023.’
But there are some clouds on the horizon, with the quarterlywarning that weaker-than-expected gold prices present a downside risk, and that these weaker prices could eventually see more high-cost producers cease or cut back their operations.
In addition, the March 2023 quarterly production was impacted by heavy rainfall in the Northern Territory, and northern parts of Queensland and Western Australia. Consequently, production at Newmont’s 15-tonnes-per-year Tanami project in the Northern Territory fell 36 per cent year-on-year to two tonnes in the quarter, with milling operations grinding to a halt for a few weeks in February. In a similar vein, heavy rainfall saw production at Evolution’s (ASX: EVN) 2.5-tonnes-per-year Ernest Henry project fall 26 per cent year-on-year to 0.4 tonnes in the March quarter of 2023.
Other causes for concern are a skilled labour shortage – a perennial issue for the mining industry – and falling exploration expenditure, decreasing 21 per cent year-on-year to $286 million in the March quarter of 2023. As a result, gold’s share of Australian mineral exploration expenditure declined to an eight-year low of 32 per cent in the quarter, down from 43 per cent a year earlier. As the quarterlynotes, ‘This decline in exploration occurred despite soaring Australian gold prices that have historically motivated high exploration expenditure.’
It was American financier and investment banker J.P. Morgan who bestrode Wall Street in the Gilded Age, and who famously said, ‘Gold is money. Everything else is credit.’ In uttering those immortal words, he reinforced the notion of gold’s intrinsic value that stretches back to about 1500 BC, when ancient Egypt made the precious metal the first official medium of exchange for international trade. So, while gold has always had its naysayers as an investment, the one thing they can’t say is that they have history on their side.