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INTERVIEW: Robust economic growth may cap gold: Nordgold

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INTERVIEW: Robust economic growth may cap gold: Nordgold

Highlights

Negative real interest rates, expectation of high inflation to support gold

Gold-producing sector likely to see more M&A

No clarity on when central banks to resume procurements

London — Robust economic growth in the developed world may cap gold's rally, Russian gold producer Nordgold's CEO told S&P Global Platts.

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"You have to have a scenario of a very successful vaccine, very successful management of COVID-19, and then also a very robust economic growth that will reduce the budget deficits, put pressure on the interest rates, that may generate inflation, the interest rates may start to go up and I think that kind of scenario you may see a cap in the gold rally," Nikolay Zelensky said in an interview.

Since the end of September gold has oscillated in an $1,880-$1,920/oz range. The spot price hit $1,965/oz on the morning of Nov. 9, before falling more than $100/oz in the afternoon as investors rushed to liquidate their positions on the COVID-19 vaccine news from Pfizer.

Further optimism about vaccine roll-outs has reduced gold's attraction this week. US biotechnology company Moderna said its vaccine was 94.5% effective, while Pfizer finessed its vaccine's effectiveness to 95%, from more than 90%.

Precious metal analysts have said that in the medium to long term gold will continue to remain well supported on the back of high fiscal deficits, low or negative interest rates, low or negative real yields and a weaker dollar.

Zelensky said there were a number of factors that supported the yellow metal. "The virus drives a lot of economic challenges, politics aggravates them, in addition to everything else and then you have these massive deficits."

"You can maintain those very large deficits through artificially low interest rates. So this is the kind of environment when you have low rates, negative real rates and expectation of high inflation. That is what supports the gold price. And it is probably going to go further."

The gold spot price, as of 1245 GMT on Nov. 19, was around $1,862/oz.

Focus on gold

With cobalt, copper, lithium and nickel key commodities in electric vehicles and energy transition more generally, 2020 saw some large precious metal producers talk of moves into the battery metals sector either through exploration or acquisitions.

Zelensky said Nordgold's focus remained on gold mining.

"We are not considering [a move into base metal mining]. We still see opportunities to grow in gold and we also see that from a capital market stand point it is easier to be a pure gold company. It is easier for investors to understand it, so that is the company's approach," he said.

With Nordgold extending its offer period in relation to its unconditional all-cash offer for West African gold-focused exploration company Cardinal Resources on Oct. 29, Zelensky said the gold sector was likely to see more M&A, including in Africa.

"I think, the [current] time in the market is the kind of a favorable time for many [operators] and there are two reasons: one of them is that many of the existing operators have become more profitable. They have more money to spend as a result they look more actively for M&A opportunities," Zelensky said.

"Another reason is as the gold price changes a lot, I think now there is a chance that people take different positions and that would lead to M&A transactions. The market is becoming more vibrant."

Bullion sales

On the subject of bullion sales, Zelensky said the company continued to sell to Russian commercial banks.

In April, the Russian government adopted a decree allowing general gold bullion export licenses to be awarded to producers. The policy enables mining companies to apply for long-term licenses permitting them to export refined gold on a par with commercial banks, with the same rights. It was meant to support exports during times when the central bank had stopped buying gold for an indefinite period.

"We have been selling gold to commercial banks for many years. It is a well-established process for us, while exporting directly would require extra work for no good reason as gains are still the same," Zelensky said.

Zelensky said the central bank's absence has not affected the company's sales. The bank was an important consumer of domestically produced gold, but its withdrawal from the market has not undermined Nordgold's capability to distribute the gold it produces.

Zelensky said there was no clarity on when the central bank might resume buying.

On Nov. 9, the company said third-quarter gold production fell 10% year on year to 264,900 oz at an all-in sustaining cost of $958/oz, up 2% year on year. Output for the nine months ended Sept. 30 was unchanged at 772,200 oz, it said.

Nordgold has production operations in Burkina Faso, Guinea and Kazakhstan as well as Russia.