Yesterday, our partners at Bloomberg reported that gold is headed for the biggest monthly advance since July, with inflation risks in focus ahead of key US jobs data due later this week that will offer clues on the economic recovery. To discuss the rising gold price, we invited two experts to join the BizNews Power Hour last night: Peter Major, a veteran mining engineer, fund manager and analyst, and David Melvill, an investment advisor and gold enthusiast. Co-host David Shapiro, who is the Deputy Chairman at Sasfin Securities, joined the conversation. One conclusion that all three experts came to – you can’t go wrong with the Krugerrand. – Nadya Swart
Peter Major on whether the gold price is on its way to $2,000 again:
It may, but I’ll be surprised if it gets over $2,000. I think it’s had a very tight correlation to the dollar and when the dollar started strengthening – gold started weakening and the dollar got stronger and stronger. And when it got down to $1,700, you could see there was resistance there and then people thought; ‘Oh my gosh, is it going to go below that?’ But I think because all the other commodities are holding up so well, there’s no way gold is going to venture very far from them. And it’s probably the least volatile and the most stable of the majority of commodities.
And I’m talking all the way from coal, oil, copper, definitely the other precious metals, you know, the platinum group metals. And it shows; it’s old, it’s slow, it’s steady. It’s a real Taurus. It’s a real reliable metal, real reliable currency. And people have a lot more fun with Bitcoin, but there’s always gold. And yeah, it’s not going to collapse when they’re printing trillions of dollars in the States alone and the other countries are trying to match it, and you’ve got every other commodity known to man shooting up, even uranium starting to move. But yeah, I think for gold to get over $2000 – people have to believe [that] there’s some kind of crisis that only gold is going to benefit from. And I don’t see that happening.
David Shapiro on gold in his father’s (who was called Mr Gold) era:
It was a lot more fun in those days. We had 40 gold mines and all of them were different. They mined different grades. So there was a different response to any movement in the gold price. And also remember the gold price in those early stages – nothing was fixed. It was only much later that that was free to trade. And what we as a firm used to do – we used to arbitrage; we would trade gold shares and promote gold shares around London, Paris, Brussels, Switzerland and that. So we traded mainly in gold shares. And unfortunately, so many of those brilliant and beautiful companies have all gone. They don’t exist. They all mined out.
For me, it was a wonderful period. I still watch it with passion. I still have my dad’s ‘By Gold’ button – he used to walk around with it. I’ll never forget the fond memories of the markets in those days, but it’s so different nowadays.I still remember all the mines and all the history around the mines. And I love to go down in the mine – there was no better experience than actually going down on one of those tours in a cage with the miners and having a look around there.
David Melvill on what makes him so excited about ‘the yellow metal’:
Well, I want to reiterate a bit of what David Shapiro says. I got to know another Mr Gold – Peter George – who sadly left this world eight years ago. Peter was very passionate about gold, and I suppose it was that contagiousness about understanding the unconventional economy and coming to understand what real money is – not just paper currency – gold and silver.
And I suppose it’s rubbed off [on] me, and I’ve embarked on a sort of a learning journey of trying to understand it and get to know the history a lot better. And then I also had the privilege of going down under with Neal Froneman and Peter Major many years ago when Aflease Gold was the first South African gold mine to be established after 30 years of no new mining. So I suppose all that sparked the interest.
David Melvill on where he would be advising his clients with the same enthusiasm for gold to put their investments:
I still think the traditional investment of a Krugerrand or a silver Krugerrand are the best investments that anyone can make in South Africa. You know, Krugerrand started in 1967 when they were just a mere R27 a coin. And today, it’s now a thousand times that price – not because gold is so great, but really probably because gold kept its value, but the Rand has been given such a hiding. So it really is probably the best rand hedge that we as South Africans can have; investing in real money by buying gold and silver.
David Shapiro on Krugerrands as an alternative to Bitcoin:
You know what surprised me – and I hate to admit this, because I’m an equity man – and I was quickly trying to get up the chart while talking to you; but on average, maybe in the last 10 years (and I’m going to have to check my money) you’ve made on a gold Krugerrand, which David’s talking about, something like 14% per annum, which I think knocks out a lot of competition. I’m going to have to check the numbers, but I did check this some time ago. And I was even looking at Afrimat’s numbers; over the last five years, they’re up like 30% per annum or something like that. And gold is up 9% per annum over the last five years – which knocks out retailers, it knocks out financials, it knocks out property by a long way, etc … So, although I hate to admit it; if you stuck to your Krugerrand – you’ve done a lot better than a lot of other equities on the market.
Peter Major on the attractiveness of gold in South Africa:
Gold has always been more attractive in South Africa than the rest of the world, because it’s got a shock absorber called the rand that really helps take the knocks out, really takes volatility out. The further you go back on a graph, the further back in time you look; it’s hard to find four years when the rand gold price went down. And even though it did go down in those four years, you had maybe a total loss of 20%.
Now, how many investments, when the bottom falls out, only fall 20%? And this only happens for three [years] – maybe four years is a record – and then it corrects that very quickly in the fifth year. So I look at how long some of these equity markets go down. They can go down and stay down for years – 10 years, five years. But gold is a very safe investment in South Africa. Its long term average, I think, is about 13%. And, you know, that’s way above inflation here. And if you want to do what people were doing with Bernie Madoff; the reason he got so many people giving him money – he didn’t show great returns, but he showed no volatility.
So I think he was only showing 7-8% a year. But he says; ‘Hey, borrow money, bond your house at four or five, and gear up – because you know I’m going to give you eight. And boy, he did give eight. Well, gold kind of does that here. It consistently beats inflation. If it does fall down, it doesn’t fall very hard. It doesn’t stay there very long. 13% plus for what – seventy years in a row? It’s not going to stop.
Peter Major on Krugerrands vs gold shares:
I’m in the cab that David Shapiro is in, because for hundreds of years gold went flat. And then even in the 1900s – it went flat for decades. So, if you’re a good mining engineer, a good investment adviser – you made money that way. You said; ‘OK, I know what the gold price is going to be for the next three years. Here’s my working cost; if I can control my cost – I can make a profit. If I can get more efficient, hire better engineers, new technology – I’ll make a little better margin. If I can increase production, you know – my fixed costs will be spread over a wider part.
And that’s how South African gold shares took off. They had to import a good mining engineer from the United States – who learned how to do cost control in Alaska on what was the continent’s largest low grade gold mine – and they brought him down to the diamond fields in the 1890s, and then took him to the gold fields. It’s about cost control. And yeah, you could sink another shaft, you could hit another vein, you could merge with somebody. So this is how you made money on a flat gold price. And then when the price went up – oh boy, then you got super dividend’s, super profits.
But we’ve lost that here. Government has literally attacked our industry. They’ve destroyed our SOEs. And now the world, like Neal Froneman is saying; even if you got a deep level gold mine, they’re going to start nailing you; ‘How do you get your electricity? If you get your electricity green, that’s OK. But boy, if you get it through coal, that’s not OK. So there’s so many negative factors against the equities, especially in this country, that you want to do it through a gold ETF, a Krugerrand, a coin – something like that.
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