Executive summary

  • Asset allocation difficult amid divergent performance and uncertainty
  • Gold well positioned to benefit under current conditions
  • Everybody loves a good story

Markets find direction from the stories investors tell themselves about the future. The current narrative is characterised by heightened uncertainty. South African investors are trying to make sense of the following:

  1. Are domestic businesses facing years of low growth? Does that make them un-investable?
  2. Can our government escape its debt spiral? Are they going to default on their repayments?
  3. Is it too late to invest in tech and pharmaceutical companies?
  4. Will value sectors like energy and financials ever recover from Covid-19?

As we move deeper into the second half of this surreal year, there exists a performance gulf between asset classes. It makes the asset allocation decision feel a bit binary; invest in assets that are priced for perfection or choose those that are lowly rated with bleak futures. It’s an agonising choice. But there’s a story that fits somewhere in the middle that is fast gaining traction. The story is of gold. And here’s how it goes.

Chapter 1: Gold wants a weaker greenback

Half of the annual demand for physical gold comes from jewellery. And because gold is priced in US dollars, a weakening of the greenback makes it more affordable to buy that gold trinket for your fiancé, spouse, or mistress. This is why a weaker US dollar is generally good for all commodity prices.

But why then, we hear you ask, has gold been rising when the US dollar has been strong? Well, are you sure the greenback has been strong? Time for our first chart.

US dollar in a weakening trend

Since the beginning of 2016, the US dollar has been losing ground (upward sloping red line) against two prominent first world currencies, the euro and the Japanese yen (equally weighted). Perhaps even more surprising is that the hard currency embroiled in the deepest uncertainty, the British pound (in blue), has also held its ground against the greenback over the last four years.

Now, let’s overlay the price of gold below (in blue) to confirm that a weaker US dollar does indeed translate into higher demand for gold jewellery and a rising gold price.

US dollar in a weakening trend

Looks like a good fit to us. Should the US dollar continue to slide against the euro and yen, the gold price should find support, not friction. Why would the greenback continue to weaken? This article highlights the salient points. Nice story so far. Let’s move onto the next chapter.

Chapter 2: A golden safe haven

Professional investors love their jargon and catch phrases. One that’s recently done the rounds in our team is, “You don’t have to chip-in to own gold!” It’s a saying born from the negative interest rate phenomenon that characterises so many sovereign bond markets. What do we mean by it?

It’s very plausible that Covid-19 leaves a lingering legacy of economic uncertainty. Safe haven assets may be in vogue for some time as a result. But because sovereign bonds – historically the primary recipient of worried capital – are yielding roughly nothing, investors are looking for other options. Gold is one of them. Our third chart illustrates this dynamic.

Investors switching from bonds to gold

We’ve got the gold price in gold, and the US 10-year Treasury Inflation-Protected Security (TIPS) yield in blue, inverted. The theory is that as yields fall (rising blue line), making the asset class less attractive, safe haven investors switch out of TIPS bonds into gold, pushing up the price. A similar correlation exists with the more traditional US 10-year Treasury, visible in the next chart.

Falling yields supporting gold price

Same story here. As bond yields fall (rising blue line), the gold price accelerates. What’s to say bond yields will continue their trajectory lower? The downward trend in US yields – and most other developed market bonds – has been intact for 40 years. And, now, there’s record stimulus being injected into the financial system that should keep rates lower for longer. But there are still those brave enough to call an end to this structural trend, and it’s worth considering their point of view in the context of the gold story.

To be sure, our own research is highlighting a short-term risk of higher US bond yields. The next chart plots our own economic indicator – a proprietary index that give us a steer on the trajectory of global industrial production / manufacturing activity levels – against the US 10-year Treasury yield. If the US bond market wakes up to the fact that economic activity is bouncing back, as our indicator suggests it is, then there’s a chance the yields move higher and gold suffers as a result.

US bond yields could rise

Chapter 3: Gold behaves like other commodities

Final chapter. Precious yellow has followed the broad trajectory of other metals over time. After the global economy’s hammering during the first half of 2020, a reasonable expectation would be that commodities are poised to climb; the demand base is low, thanks to suppressed industrial production, and lockdowns are broadly beginning to lift the world over.

However, if you believe this thesis, then you’ll probably get better returns from the higher beta commodities like copper, silver, or platinum. To illustrate this, peruse our last chart below.

Gold versus copper

Our economic indicator is in red. The blue line is the copper price relative to the gold price – when it falls copper is underperforming gold and vice versa.

The message here is clear: If global economic growth is accelerating (rising red line), you want to own higher beta commodities like copper. When it falls, own gold. For the purposes of our bullish gold story, there looks to be a long-term, structural trajectory in favour of gold over copper since 2009.


We pine for certainty in times of uncertainty. Stories help us make sense of the world, ameliorating some of the discomfort that comes with doubt. Those stories move markets. And, right now, there’s a compelling story for a higher gold price. The caveat that might alter the script is higher bond yields – possible in the short term, but an entrenched, multi-year trajectory of rising yields seems unlikely.

We’ve held a small but structural physical gold (via ETF) position across our funds for many years. Our indirect gold exposure currently comes through Sibanye Stillwater, but the increasing difficulty of mining gold in SA (deeper mines with high labour costs) means that we tend to favour physical gold over the businesses that mine the precious metal. Still, the story around gold is one we like.