BRICS coming to Johannesburg - exploring opportunities in gold!

This month (August), South Africa will host members of the BRICS (Brazil, Russia, India, China, and South Africa) alliance at the 15th BRICS summit in Johannesburg (also known as the City of Gold).

The BRICS nations are expected to discuss various topics, including the global economy and trade, climate change, sustainable development, security and cooperation, and the expansion of BRICS membership. BRICS nations currently contribute more to the world GDP than the industrialized G7 ( United States, Britain, Canada, France, Germany, Italy and Japan, with representation from the European Union): the nations at the summit taking place in August are also expected to launch a BRICS currency backed by gold, which would be a significant step towards reducing the reliance of BRICS countries on the US dollar.

What's the deal with gold?

Gold has been a valuable commodity for centuries and has only increased in value recently. As a safe-haven asset, gold is often seen as a hedge against inflation and economic uncertainty. In the past, gold coins were often used to trade goods and services between different countries. Today, gold is still used as a currency in some countries and is traded on the global financial markets.

Introducing a gold-backed currency could have far-reaching implications for the global markets. This could potentially strengthen a bullish trend in the gold market and fuel demand. Besides the BRICS incentive to introduce a gold currency, central banks are also major buyers and sellers of the precious metal, alongside technology requirements and jewellery.

Last year, central banks were net commodity buyers, diversifying away from the dollar in response to sanctions and geopolitical tensions. This contributed to the commodity reaching fresh highs of $2,000 per ounce in 2022. In the same year, Zimbabwe also moved to gold coins in an attempt to stabilize its currency.

The precious metal demand had a mixed picture at the start of 2023 (Q1 2023). In Q2 2023, the demand went down, which, according to the World Gold Council, was driven by a marked deceleration in net central bank buying compared to above-average purchases in Q2 in 2022. The Central Bank of Turkey sold gold into the local market, which softened demand. This was in response to tight conditions after a temporary ban on gold imports.

The graph below (from the World Gold Council) shows us where the demand for gold came from during Q2 2023 and comparative periods.

It's worth noting that the gold spot price and the value of the US dollar have an inverse relationship. This means that when the dollar's value goes up, the price of gold tends to go down, and vice versa.

According to Louise Street, senior markets analyst at the WGC: "Record central bank demand has dominated the gold market over the past year and, despite a slower pace in the second quarter, this trend underscores gold’s importance as a safe haven asset amid ongoing geopolitical tensions and challenging economic conditions around the world."

Africa accounts for about 40% of the world's gold, and the top five gold-producing countries in Africa are Ghana, Mali, Burkina Faso (from West Africa), Tanzania (East) and South Africa,

How can investors invest in gold?

There are many ways to invest in gold. Some of the ways include exchange-traded funds (ETFs) that track the price of gold. When you buy a gold ETF, you essentially buy a small piece of a large pool of gold. The 1nvestGold ETF and NewGold ETF are both Exchange-Traded Funds (ETFs) that track the price of gold.

Mining companies with operations to mine gold can also expose investors to the gold market, depending on the size of the operations. Junior gold miners and explorers tend to be more volatile than larger miners.

There are many factors to consider when investing in gold mining companies. These include the geographical location of the mines, the size of the gold reserves, the development stage of the projects, the financial strength of the companies, the management team, the gold prices, and the investor's risk appetite.

The Johannesburg Stock Exchange (JSE) has some giant miners like Harmony Gold Mining Company Limited (HAR), AngloGold Ashanti Limited (ANG) and Sibanye Stillwater Limited(SSW), with multiple gold mining operations in Africa. The Australian Stock market (ASX) is also known for having several junior miners. These include gold miners with operations little operations or exploration projects on African soil like Golden Rim Resources Limited (GMR), Perseus Mining Limited (PRU), and Tietto Minerals Limited (TIE), which have operations in other parts of Africa, including West Africa.

Conclusion

Investing in gold companies, ETFs, and other financial assets can be a more liquid, cost-effective, and diversified way to invest in gold. These investments are traded on exchanges, meaning they can be bought and sold easily. They also typically have lower storage and insurance costs than physical gold.

As countries get back to work and money needs to be printed to trade, in the case of having a gold-backed currency, more gold would be required for a country to bring more gold-backed money into the economy. Despite the possibilities of such happening, the impact of a gold-backed currency on gold demand is likely to be mixed. There are potential benefits and drawbacks to consider, and the ultimate impact will depend on factors like supply and demand. 

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Sources – EasyResearch, World Gold Council, BusinessLive, Bloomberg, The U.S. Departments of State, Golden Rim Resources Limited, Perseus Mining  Limited. and Tietto Minerals Limited, Harmony Gold Mining Company Limited, Anglogold Ashanti Limited, Sibanye Stillwater Limited, Seeking Alpha

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