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All that is gold glitters

World Gold Council director John Mulligan probes into gold’s robustness amid threats of climate change, the global transition to renewables and the booming Asian economy. And the outlook is looking good.

The Australian dollar gold price leapt to new heights on the back of global uncertainty surrounding the United States–China trade wars in 2019.

With the Reserve Bank of Australia’s (RBA’s) move to cut interest rates to record low levels this year, gold has once again turned into a safe haven for investors.

This is the purchasing trend of the year, but it primarily applies to institutional investors and central banks. Their move away from the American dollar has led to record buying that the market hasn’t seen in decades.

World Gold Council director of market and member relations John Mulligan says institutional investors have returned to gold at a promising time.

“You can see this in central bank buying,” Mulligan tells Australian Mining at the 2019 International Mining and Resources Conference (IMARC).

“Some of them are buying based on policy reasons to avoid risks in the global economy and, particularly, prospects in the United States.”

Investors also revived their interest as the gold price rose, including its Australian dollar value which reached record highs, according to Mulligan.

In late August, gold broke through sideways trading of between $US1100–$US1350 ($1623.7–$1992.75), that had persisted for a few years, to reach close to $US1550 an ounce.

To Mulligan, this not just a currency issue but also reflects gold’s wider use as a risk management asset. It therefore makes it surprising that gold remains a deeply underinvested product among institutional investors, such as pension funds, sovereign wealth funds and endowments.

The world’s total gold investment hovers just around 1–2 per cent of global assets under management, with most institutional investors not yet looking at the precious metal, according to Mulligan.

This might become problematic for the immediate gold price, which is currently driven by one thing, and that is institutional investment.

But investors are becoming aware of a wider set of risk factors. One of the issues that might lead to further investor reappraisal of gold is its potential strength in the face of climate-related physical and transition risks.

WGC director John Mulligan

World Gold Council, in its research report ‘Gold and climate change: Current and future impacts’, states that gold will likely be far more robust than nearly all other mainstream asset classes.

“Our analysis, which we produced in collaboration with an independent research consultancy, shows that if you’re managing a portfolio and choosing among investment options, such as equities, bonds and property, gold will likely emerge to be a more stable asset through to 2030, 2050 and 2100, and across the four IPCC (Intergovernmental Panel on Climate Change) global warming scenarios of 1.5, 2, 3 and 4 degrees Celsius (above pre-industrial levels),” Mulligan says.

“If you look at extreme physical risks, a lot of the soft commodities and other metals may likely be impacted because they are concentrated in specific regions, making them dependent on factors such as local weather and shipping.

“But gold isn’t as exposed to these climate-related physical risks because gold mining is spread across the world and, in many instances, is already starting to plan to build robustness into local operations.”

Gold is evolving from being a financial risk management asset, to also potentially emerge as a climate risk management tool.

The commodity will still feel the headwinds amid the industry’s transition to renewables, but not to the degree of other assets, such as the world’s largest global equity market, US equities.

Gold has also shown resilience in operating in inhospitable conditions, such as those of a remote operation.

“Compared to other sectors, gold mining is actually not in a bad place because the vast majority of its emissions are related to purchased electricity or from fuel and energy use on-site,” Mulligan says.

“And as renewable technologies are scaling up and becoming far more cost-effective, they’ll be competitive to the point where they might save companies money in future decades. There is a cost benefit to move into renewables.”

Companies may eventually find themselves “out of the money” if they commit to large-scale diesel generators or the incumbent technology now, compared with investing in renewables, according to Mulligan.

This remains likely even if the substantial initial capital outlay for renewables is considered.

As the gold mining sector makes its move to renewables, the transition might also benefit local communities. They may have access to clean energy that would otherwise not be available to them, Mulligan adds.

“All the gold mining companies that the World Gold Council has spoken to, which are together representative of over 50 per cent of the world’s formal gold production, have been very supportive of the potential use of renewables,” Mulligan says.

“Most of them are already taking action in this direction. And for a developing economy that never had the substantial legacy commitment to fossil fuel-generated electricity grids, it might leapfrog and consider new technologies straight away. You don’t have to consider decommissioning.”

The challenge is for developing economies and policy environments to embrace and support sustaining economic growth, but also to encourage the construction of renewable infrastructure, Mulligan says.

While it might be challenging in some countries, Mulligan believes progress will need change in the global policy environment and international cooperation to facilitate the world’s move away from fossil fuel dependence.

Many of the key countries will also be those driving the increase in consumer demand for gold in the future.

“The force driving gold’s long-term demand are the big, growing economies of the world,” Mulligan says. “These include China, India, and potentially, the neighbouring economies of Vietnam and Indonesia.”

“They are not only the most populous nations in the world, but will also become the single, strongest long-term driver of gold thanks to their growing income levels. And in this way, gold will also be a proxy for Asia’s economic development.”

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