The Zimbabwean economy and its gold sector stand to benefit from a marginal growth in demand of the yellow metal on account of a number of factors that are seen spurring production in 2017.
Gold demand in 2017 is expected to be driven by trends in the global economy including heightened political and geopolitical risks, currency depreciation, rising inflation expectations, inflated stock market valuations, long-term Asian growth and opening of new markets, according to the World Gold Council (WGC)’s 2017 outlook.
This implies positive prospects for the resource-driven Zimbabwean economy which has raked in close to US$11 billion in gold exports between 1980 and 2015. Zimbabwe, according to central bank governor John Mangudya, arguably has the second largest gold reserves per square kilometre in the whole world with 13 million tonnes of gold, proven, underground but since 1980 the country has only managed to mine 580 tonnes.
WGC said the gold price had a strong performance in 2016, rising close to 10% in US dollar terms, higher in most other currencies, and amassing multi-year record inflows through physically-backed gold exchange traded funds (exchange-traded funds) ETFs – making it one of the best performing assets last year, despite a post-US election pullback.
“As we start the New Year, there are some concerns that US dollar strength may limit gold’s appeal. We believe that, on the contrary, not only will gold remain highly relevant as a strategic portfolio component, but also six major trends will support demand for gold throughout 2017,” WGC said.
The WGC said heightened political risk is on account of key elections to be held in Europe in the Netherlands, France and Germany in 2017 as well as the fact that Britain must negotiate its exit from the European Union. In the US, there are also concerns on the Donald Trump administration.
“Gold historically performs better than other high-quality liquid assets during periods of crisis and that makes it an excellent liquidity provider of last resort,” the WGC said.
Nominal interest rates, WGC said, are widely expected to increase in the US this year, but economists forecast that inflation will rise as well.
“An upward inflationary trend is likely to support demand for gold for three reasons. Firstly, gold is historically seen as an inflation hedge. Secondly, higher inflation will keep real interest rates low, which in turn makes gold more attractive. And thirdly, inflation makes bonds and other fixed income assets less appealing to long-term investors,” it said.
The interconnectedness of global financial markets has resulted in a higher frequency and larger magnitude of systemic risks. And as Jim O’Sullivan puts it: “The US economic expansion will not last forever.” In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.
“Macroeconomic trends in Asia will support economic growth over the coming years and, in our view, this will drive gold demand. In Asian economies, gold demand is generally closely correlated to increasing wealth,” the WGC said, adding gold is becoming more mainstream with gold-backed ETFs made gold accessible to millions of investors, primarily in the West, over the past decade, and expanding into other markets.
Gold remains one of Zimbabwe’s major exports, raking in as much as US$10,061 billion between 1980 and 2015, according to central bank figures. Gold exports amounted to US$2,3 billion between 1980 and 1990 before growing marginally to US$2, 5 billion between 1991 and 2000. Between 2001 and 2009, gold exports stood at US$1,9 billion before peaking to US$3,3 billion in the period between 2011 and 2015 mainly on account of increased production due to new investment in the multiple currency regime that brought stability in the economy.
Zimbabwe’s gold deliveries to Fidelity Printers and Refiners (Fidelity) went up almost 16% to close 2016 at 21,4 tonnes, mainly on account of a growth in the contribution of small-scale miners.
Small-scale producers contributed 9,7 tonnes while primary producers totalled 11,8 tonnes. Small-scale producers started the year with a contribution of 627,5 kg in January before growing to a peak of 1,1 tonnes in November and outperforming primary producers. The WGC is a market development organisation for the gold industry providing insights into the international gold markets. WGC is based in the UK, with operations in India, the Far East and the US with members comprised of the world’s leading gold mining companies.