After the Bell: Gold may not glister, but it sure is shiny

10 Apr 2023

Perhaps the most famous (and the most misquoted) saying about gold is Shakespeare’s line in The Merchant of Venice – ‘All that glisters is not gold.’ Glistens is often substituted for glisters, which is in effect changing Shakespearean English to Middle English. Modern readers sometimes go even further, substituting ‘glitters’ for ‘glistens’. It doesn’t matter; it means the same thing.

The phrase appears in the golden casket, one of three available to potential suitors of the very desirable Portia. Portia’s father, as you may remember, was worried that gold diggers would seek Portia’s hand in marriage for her riches. So, he made a very odd will requiring potential suitors to select one of three caskets (in effect jewellery boxes): one gold, one silver and one lead. Only the suitor who chose the right casket, the one with Portia’s image in it (the lead one, obvs), could marry Portia. Losers had to stay single, tell no one what happened, and leave immediately. Nice.

Sadly, the Prince of Morocco chooses the gold casket; inside he finds a skull with a written scroll rolled up and stuffed into one of the skull’s empty eye sockets. Very Game of Thrones. Shakespeare was nothing if not, you know, dramatic. The actual inscription is a very beautiful ode to the vagaries of wealth and money:

All that glisters is not gold—
Often have you heard that told.
Many a man his life hath sold
But my outside to behold.
Gilded tombs do worms enfold.
Had you been as wise as bold,
Young in limbs, in judgement old,
Your answer had not been inscroll'd
Fare you well. Your suit is cold—

In the scene, Shakespeare is making literal the deceptive attractiveness of wealth and the shininess of gold, and the way it makes people lose their sense of balance and judgement. Looking at the stock market, you can’t help but be impressed with the bard’s prescience, because really nothing about the current gold market makes much sense.

Just start with the basics: The reason to invest in gold is that it’s an age-old store of value. That conjures an image of a steady plough that produces a predictable and knowable yield. Instead, the gold price jumps around like a jackrabbit caught in the headlights on a dark Karoo road. The dollar gold price has gone from just under $2,000 per ounce, to around $1,600 an ounce, and back up to just over $2,000 in the space of a year.

It’s currently just below an all-time record in dollars and has already reached a record price in rands and Aussie dollars. As my colleague Ed Stoddard reports here, gold breached $2,000 an ounce on Tuesday and was fetching around $2,030 an ounce, nearing its record of over $2,075 reached in August 2020, according to World Gold Council data.

Meanwhile, the rand/gold price scaled a new high of R1,168,270 per kg, a surge that will flow straight to the bottom line of South African producers of the precious metal.

Of course, gold miners are ecstatic. Those lumbering old mines that laid the foundations of Johannesburg are still churning out cash after more than a century. Who would have thunk it?

Investors, too, must be pleased. All the major gold companies are now solidly profitable, have low debt, pay respectable dividends, and earn on par with most other sectors of the global economy. Gone are the days of massive hedging books and seemingly insurmountable debt burdens. I wouldn't be surprised if we see some consolidation in the industry.

How companies like AngloGold or Gold Fields can remain independent when others double their size are trading at around double the value is hard to fathom. If you were the larger entity, wouldn’t you trade some of that margin for a much larger and longer production profile?

But that is not the tricky part. The tricky part is trying to distil the reasons for gold’s current strength because all the old reasons seem to have gone out the window. In the past, the gold price and the dollar price were more or less inverted. Gold is normally priced in dollars, so, obviously, if the dollar rises, you can buy the same amount of gold for fewer dollars, so the gold price will trend downwards.

However, this time, the gold price and the dollar price are rising in conjunction. And that’s not the only anomaly. Normally, interest rates and the gold price also move inversely (actually this is more a popular belief than a verifiable fact, but at times, it has been demonstrable). The theory is that at times of high interest rates, money looking for a safe haven moves from gold to bonds, which, unlike gold, at least offer some yield at this point in the cycle. But once again the gold price is currently rising along with increasing interest rates.

What about good old supply and demand? Well, gold supply between 2015 and 2019 was more or less static at around 6,000 tonnes a year. It dropped in the first Covid year because mining operations were halted, but it has rebounded and is now back to over 6,000 tonnes. In other words, supply and demand is not the reason for the near-record prices. Neither supply push nor demand pull explains the near-record prices.

The given reason is a word you suspect is complicated enough for Shakespeare to love: polycrisis. In a world of complicated and mixed unknowns, the known unknowns become, contrary to reason, something of a more attractive alternative. It is significant that over the past year, the biggest appetite for gold has come from central banks.

As Shakespeare might have said: “Confusion now hath made his masterpiece”, which, in fact, he did say. Typical. BM/DM

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