Month: August 2025

More bang for the gold buck above and below the ground[1]

The Donald has slapped us with tariffs. He has also given us an extra R20 billion a year in the value of the gold we sell and added about R600 billion to the value of the gold shares listed on the JSE. The gold price has been on a tear this year. Up by 23% in USD and 19% in mighty ZAR. If we adjust for US inflation the real inflation adjusted dollar price of gold is now at record levels-  higher than it was in early 1980 when the gold price broke 800 dollars per Troy ounce. In real rand terms the gold price is now almost to 3 times higher than it was in 1980.

Gold Price Monthly Data (2020-2025)

Real (Inflation Adjusted) Price of Gold USD and ZAR. Monthly data.

Source; South African Reserve Bank and Investec Wealth and Investment

A favourable trend for producers but not favourable enough to prevent a continuous decline in gold mined in SA. The rand costs of mining gold, especially their employment costs, have risen faster than prices in general reducing profits. There is also less gold to be found in the ground. The grade of the ore extracted for gold has fallen from 8 grams per tonne of rock in 1980 (a mere sliver of gold trapped in rocks deep underground) to about 6 grams and less today. It was 12 grams per tonne in 1970 before the gold price took off with the end of the gold standard. The last new significant increase in gold mining capacity was the South Deep venture undertaken by Gold Fields in 2015. And before that the Moab-Khotsang development of 2003- now part of Harmony.

Gold mining now plays a much-diminished role in the SA economy. In 1980 gold mines in SA produced close to 1000 metric tonnes of gold. Current output appears to have stabilised at about 100 tonnes. Gold sales in 1980 were equal to an imposing 15% of the economy (GDP) and 45% of all merchandise exports. These proportions today are about 2% of GDP and 7% of goods exported.

Annual rand revenue for Sales of Gold and Platinum Group Metals

Source; South African Reserve Bank and Investec Wealth and Investment

What is good for the gold price has been even better for the shareholders in gold mines with significant reserves of gold in the ground. That are consistently revalued in line with the current price of gold to add to the prospective operating profits from the mines. It is suggested that proven reserves of gold of the SA mines are equivalent to about 20 times the current output of gold.

This year the market value of the four largest gold mining companies listed on the JSE (Goldfields, Anglogold, Harmony and Pan Africa)  has about doubled this year. From a combined market value of 30 billion dollars in January, they are worth about 70b dollars today. Yet before we get carried away with the scale of this wealth creation on the JSE, it should be recognised that the combined value of the JSE listed gold miners is now less than that of the leading US listed global miner, Newmont, with a market value of USD75b.

The market value of JSE listed Gold Mines Monthly Data (2020-2025)

Source; South African Reserve Bank and Investec Wealth and Investment

The gap between the gold price and what is described as the all in sustaining cost of mining gold that excludes capex, has widened significantly –of approximately 1971 dollars per ounce produced and sold by Harmony, 1694 for Anglo and 1739 for Goldfields. Operating profit margins (the jaws) have therefore widened dramatically. You clearly get more bang for your gold buck investing in gold mines rather than in gold bars. Since 2020 the monthly per centage move in gold shares is about twice the move in the gold price- in both directions.

The changes in the gold price beta have a statistically significant impact on the changes in the value of the gold shares. They explain up to 50% of the move up or down in the value of the shares. Yet still leaving much to be explained in the behaviour of shares in gold mines by forces other than the gold price itself. For example, allowing for the risk that extracting the gold bearing rock will rise sharply as mines attempt to add production. Or that cash flush gold mine managers will pay too much to acquire other gold mines. Or most important, that the gold and other mines over their long lives may be subject to onerous taxes and regulations or even expropriation without adequate compensation. Especially likely when they prove highly profitable. Unknowns that clearly affects the present value of any mining venture.  Gold in the ground is worth more in North America and Australia than in SA and Africa for these reasons – less uncertainty about mining policies – and more sympathy for the capital providers.

Judged by the Amendment of Mining Regulations Bill, now with Parliament, the SA government prefers not to recognise how the value of a gold or indeed any other mine, and the incentive to explore for and establish new mines, is adversely affected by policies that are hostile to risk taking shareholders.  The government rejects advice from the mining industry and serves special not the general interest in a thriving mining sector.

[1] Campbell Parry and Graham Barr have been most helpful. They do not bare any responsibility for my interpretations

A Brave New Budget World Beckons

A Brave New Budget World Beckons

The Minister of Finance and his National Treasury have had a rude awakening. The Treasury set the National Budget and Parliament fell obediently in line to rubber stamp. The Treasury decided how much the government would spend, collect in taxes and how much and how the RSA would have to borrow to make up the difference. Until this year, when Parliament decided the final shape of the Budget. As it will do in any future of government by coalition -as the Minister of Finance, Enoch Godongwana, has clearly acknowledged.  

The financial legacy left by the once all powerful Treasury is an  un-comfortable one- The Treasury has bequeathed a mountain of close to 6 trillion rand of debt and a huge interest bill now close to R40 billion a year. Equivalent to a suffocating  20% of all national government spending. This interest to spend ratio had fallen to 8% by 2013 but has more than doubled since then.

Interest paid and the Ratio of Interest Paid to all National Spending.

Source; SA Reserve Bank and Investec Wealth & investment

After largely balanced budgets between 2000 and 2008, it went gradually and consistently wrong after the recession of 2009 – linked to the Global Financial Crisis. Tax revenues fell away while government spending remained on its nominal growth path of over 8% p.a. The deficit jaws have not closed since then and widened further during the Covid lockdowns of 2020-2021. Between 2009 and mid 2025 national government expenditure has grown by an average 8.3% p.a. (equivalent to an after inflation growth rate of about  2.8% p.a.) yet more than the slow growing economy could fund. The growth in tax revenues lagged behind growing by an average 7.2% p.a. over this extended period. And so between 2015 and 2025 national debt grew by a debilitating 15.6% a year on average.  Smallish Budget deficits became highly leveraged.

The Budget Arithmetic 2000-2025. Monthly data (smoothed)

Source; SA Reserve Bank and Investec Wealth & investment

RSA National Debt and Growth in Debt; 2000-2025

Source; SA Reserve Bank and Investec Wealth & investment

But there was something more than budget deficits that have increased the interest cost of funding the growing debt. The average time to maturity of newly issued national debt was allowed to increase. This significantly increased the cost of funding the national debt. Longer term rates of interest on RSA debt are consistently higher than on shorter term debt. An RSA 20 year bond now offers 12.18% p.a. compared to less than 7% paid on a 3-month Treasury Bill. Between 2010 and 2025 the difference in yield on a 10 RSA bond and a 3-month Treasury Bill has averaged over 2% a year while the difference in yield between a 10 and 5 year bond averaged over 1% p.a. Yet between 2010 and 2019 the time to maturity of the average RSA bond in issue increased consistently from 120 to 190 months. It has since declined to about 140 months. Which is a very large number by international standards.

The RSA Bond Yield Curve. 2015 – 2025. Time to maturity on X axis

Source; Bloomberg and Investec Wealth & Investment

The reason for extending the maturity structure of RSA debt was to avoid roll over risk. That is the apparent danger of having to repay debt,  issuing new debt, at a time when the when the market might be highly unsympathetic. But SA debt of all durations is constantly being rolled over – given the amount of debt in issue and maturing regularly. Avoiding roll over risk was a very bad and expensive idea.

Should the market be temporarily closed the Reserve Bank can always be called upon in an emergency to provide cash for the government. It is one of the great advantage of being able to issue debt in your own currency, the quantity of which you control. Unlike foreign debt that you can default upon. The size of the market in rand denominated RSA debt is a large strategic advantage for SA that has been frittered away by paying up unnecessarily for very long-term money.

The risk that SA may be forced later or sooner to monetise its debt to inflate away its debt burden is the reason why RSA long term interest rates are as high as they remain. These high yields compensate lenders for more inflation expected and an accompanying weaker exchange rate. That SA prefers to issue long dated debt at a high fixed rate gives a poor signal about an official belief in the sustainability of fiscal policy and the prospect that inflation may fall rather than rise. As it has done, making previous long-term borrowing at high nominal rates ever more expensive for the tax payer, whose incomes are now rising at a slower rate.

The task for any successful coalition led Budget is to ensure that SA lives within its means. To balance the books by limiting much wasteful spending with authoritative expenditure reviews that have been woefully lacking. And by walking the lower inflation walk – by borrowing significantly more at the short end – rolling over long term debt for shorter varieties. Accepting the risks that inflation could drive borrowing costs higher. A prospect that would help discourage inflation and government spending.