What has just happened?
The world is currently experiencing a Gold rush, as prices rocket to $2,000 per troy ounce. [1]While we are experiencing a global pandemic, Gold has experienced a 36% price increase [2] which is a figure greater than any other stock index so far in 2020. To place this in context, $7.4bn was invested in Gold backed Exchange Traded Funds in July alone, [3] on top of the $40bn already invested in the Q1 2020. [4]
Investing in the gold market? Here is what to expect.
What does this mean?
Gold has been known as a ‘haven’ in which nervous financial investors hold their money. [5] This is due to the negative correlation between real interest rates and the price of Gold. Currently, the UK has negative real interest rates, as inflation 1.19% is higher than the base interest rate of 0.1%. The negative return on bonds and the higher inflation rate turns investors to diversify their portfolios. Gold is seen as an asset that retains value during a recession thus, would provide greater security in achieving positive yields of return on portfolio investments. [6]
To match this increased investor demand for Gold, exchange funds like ETF/SPDR Gold Shares have been acquiring Gold to fulfil the demand. One fund’s holdings are housed in the bank vault of HSBC London, with the total tonnage overtaking that held in the Central Banks of Japan or India.[7] Furthermore, Central Banks are looking at methods to shield their economies from the incoming recession caused by COVID-19. Central Banks have been collectively hoarding Gold stores as they are deemed the ‘perfect piggy bank’. [8] The Gold stores can be used to finance the rebuilding and future investment in economies as the financial sector slows down and other assets lose their value. The jewelry sector in India has the largest consumer demand for Gold but has collapsed due to COVID-19.[9]
How does it impact the legal sector?
The price increase of the commodity has correlated with an increase in revenue for mining companies. Some international mining companies have seen a 12 % increase in revenue over the crisis period, while the total per-share dividend of the five biggest Gold miners has risen from $1.50 in 2015 to $3.20 in 2019.[10] Succeeding a 5 year low in exploration budgets and land purchasing, the ‘fools Gold rush’ has spurred their investment into the industry.[11]
Furthermore, Mergers & Acquisitions is a key commercial law practice area. Looking closely at specialist firms there has been surge of activity to acquire mining companies and expand digging sites. Prior to the Pandemic, global exploration budgets had more than halved from their 2012 highs of around $10 billion. Yet, the surge in gold prices has seen a palpable rush for new land for example Victoria Australia has become a battle ground of 60 firms trying to acquire the area.
The expansion and exploration of new mining sites requires specialist financing. Which the legal teams secure through the negotiation of facilities agreements, credit facilities and project finance deals. Moreover, commodity rich Sub-Saharan nations often use wholly – government-owned entities as a method of expanding and financing their national mining sector. For specialist law firms this means ensuring that these national governments do not pose credit risks to project finances’ as well as negotiating deals with private investment firms.
Moreover, specific M&A deals to note within the sector include, the successful $50m deal for the acquisition of the Kapan mine in Armenia from Russian miner Polymetal. As well as Kopy Goldfields acquiring 100% shares of Amur Gold Company Limited through a reverse take-over deal. [12]
Looking at the current Geo-political stage, it has to be noted that the continual tension between China and the USA may have a lengthening impact on the price inflation of Gold. This rise in tensions, along with a weaker U.S. dollar, is creating a very Gold-supportive environment for traders. With Gold having its reputation as a safe haven, it seems a worthy investment while the two largest economies battle back and forth. This is continuing the price stimulation within Asian hubs as investors continued to buy Gold as a hedge against a deteriorating economic backdrop.[13
Written by Megan Hornsby
Assessing Firms:
#HolmanFenwickWillanLLP #BryanCaveLeightonPaisner #Clyde&CoLLP #HFW #HillDickinsonLLP #ReedSmithLLP #StephensonHarwood #WatsonFarley&WilliamsLLP #LinklatersLLP #NortonRoseFulbright #Penningtons
References:
[1] Henry Sanderson, ‘How the 2020 gold rush smashed through records’ (2020) Financial Times <https://www.ft.com/content/8ff55914-403b-450a-9c44-a88368aa978b>
[2]Henry Sanderson, ‘How the 2020 gold rush smashed through records’ (2020) Financial Times <https://www.ft.com/content/8ff55914-403b-450a-9c44-a88368aa978b>
[3] ETFS: Exchange-traded fund which is an investment fund traded on stock exchanges.
[4] Henry Sanderson, ‘Gold price hits $2,000 for first time on Covid-19 and inflation fears’(2020) Financial Times< https://www.ft.com/content/566dd8f7-7efe-45b6-8a44-b20f7f0f283e>
[5]Henry Sanderson, ‘Gold price hits $2,000 for first time on Covid-19 and inflation fears’ (2020) Financial Times< https://www.ft.com/content/566dd8f7-7efe-45b6-8a44-b20f7f0f283e
[6] Paul Summers, ‘The gold price is on a tear. I think those buying now could still strike it rich’ (2020) Motley Fool
[7] Henry Sanderson, ‘How the 2020 gold rush smashed through records’ (2020) Financial Times <https://www.ft.com/content/8ff55914-403b-450a-9c44-a88368aa978b>
[8] DNB ,’ DNB’s gold stock’ (2020) DNB <https://www.dnb.nl/en/payments/goud/index.jsp>
[9] Mukesh Kumar, ‘India’s gold market in May: Jewellery demand reviving gradually, Indian gold ETFs attract strong inflows’(GoldHub, 19th June 2020)< https://www.gold.org/goldhub/gold-focus/2020/06/india-gold-market-may-jewellery-demand-reviving-gradually-indian-gold>acessed on 16th of August 2020
[10] Marcelo Azevedo, ‘Lessons from the past: Informing the mining industry’s trajectory to the next normal’ (2020) Mckinsey & Company < https://www.mckinsey.com/industries/metals-and-mining/our-insights/lessons-from-the-past-informing-the-mining-industrys-trajectory-to-the-next-normal#>
[11] Paul Summers, ’ The gold price is on a tear. I think those buying now could still strike it rich’ (The Motley Fool, 8th Aug 2020) < https://www.fool.co.uk/investing/2020/08/08/the-gold-price-is-on-a-tear-i-think-those-buying-now-could-still-strike-it-rich/> accessed on 16th of Sept 2020
[12] Kopy Goldfields, ’Kopy Goldfields acquire Amur Zoloto through reverse takeover’ (Kopy Goldfields, May 29th 2020) < http://media.kopygoldfields.com/2020/05/Kopy-Goldfields-to-add-significant-gold-operations-via-a-conditional-reverse-takeover-of-Amur-Zoloto.pdf> accessed on 19th of August
[13] Jackson Chen, ‘Gold price up as pressure builds on US-China relations’ (2020) Mining [dot] com
<https://www.mining.com/gold-price-up-as-us-china-tension-builds/>
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.