BENGALURU – Gold prices rose for a second straight day on Thursday as risk averse sentiment amid weaker oil prices drove up the demand for the metal, with a softer dollar and weakness in US Treasury yields also lending support.
Spot gold rose 0.5% to $1 252.41/oz at 0812 GMT. It rose 0.3% in the previous session, its largest intraday percentage change since June 6.
US gold futures for August delivery rose 0.6% to $1 253.30/oz.
“A softer US dollar and a risk-off bias following the recent declines to crude saw gold turn higher during Asian hours on Thursday,” MKS PAMP trader Sam Laughlin said in a note.
Oil turned lower on Thursday after posting gains earlier in the session as traders look ready to test new lows for crude prices with worries persisting over a global glut. [O/R]
“The uncontrolled oil price spill in the futures markets may have seen some traders pushing the risk aversion button and buying gold,” said Jeffrey Halley, senior market analyst at Oanda.
“The primary driver appears to be the flattening of the longer-dated US Treasury curve.”
The US Treasury yield curve flattened to almost ten-year lows on Wednesday as investors evaluated the impact of hawkish Federal Reserve policy on the economy even as inflation measures are deteriorating.
US home resales unexpectedly rose in May to the third highest monthly level in a decade and a chronic inventory shortage pushed the median home price to an all-time high.
Gold is highly sensitive to rising rates and yields, which increase the opportunity cost of holding nonyielding assets such as bullion while boosting the dollar, in which it is priced.
“Investors are waiting for any clues on whether the timing of the next rate hike is September or December,” said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.
Spot gold may bounce more into a range of $1 257 to $1 261/oz, as it has cleared a resistance at $1 251 according to Reuters technical analyst Wang Tao.
The US dollar index, which measures the greenback against a basket of six currencies, retreated from a one-month high of 97.871 set on Tuesday.
Holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.04% to 853.98 tonnes on Wednesday.
Among other precious metals, silver gained 1% to $16.61/oz. Platinum touched its highest in a week during the session and was up 0.6% to $929.20/oz, while palladium slipped 0.8% to $880.99/oz.
Eskom and Transnet need to borrow billions more than anticipated in 2016, National Treasury revealed in its 2017 Budget Review on Wednesday.
Even as Eskom’s financial performance improved in 2015/16 as a result of a 12.7% tariff hike and a revenue increase by R10.5-billion to R161-billion, it still required borrowings for its new build and electrification projects.
In addition, Transnet grew revenues by 1.7% to R62.2-billion in 2015/16. While it has spent R122.4-billion on capital expenditure in the last five years, it plans capital investments of R273-billion in the next seven years, Treasury said.
These massive expenditure projects mean the entities take up the biggest share of government’s borrowings.
“In 2016/17 it (borrowing) will amount to R254.4-billion, or 5.8% of GDP,” it said. “This is R32.8-billion more than was projected in the 2016 Budget, reflecting a larger consolidated budget deficit and higher borrowing estimates by State-owned companies – primarily Eskom and Transnet.”
In 2015/16, borrowing by the six largest State-owned companies – the Airports Company of South Africa, Eskom, Sanral, SAA, the Trans-Caledon Tunnel Authority and Transnet – reached R128-billion.
Eskom and Transnet accounted for 74% of the total, Treasury explained.
Eskom increased planned borrowings in 2016/17 increased from R46.8-billion to R68.5-billion. “The increase results from Eskom’s revised assumptions of cost savings and lower-than anticipated tariffs during the current price determination period,” it said.
Over the next seven years, Transnet plans capital investments of R273-billion, to be funded by earnings and borrowings against its balance sheet, it said.
Foreign debt funding was lower than estimated, reaching R29.5-billion compared with an expected R42.6-billion.
“The six companies project aggregate borrowing of R102.6-billion in 2016/17 and R307.1-billion between 2017/18 and 2019/20.
“Gross foreign borrowings are expected to account for the majority of total funding over the medium term, largely as a result of Eskom’s efforts to obtain more developmental funding from multilateral lenders.”
In 2016, Eskom concluded a deal with the China Development Bank to get a $500-million loan facility.
However, Eskom is likely to need additional equity injections in the coming three to four years, according to Nomura emerging market economist Peter Montalto. “Its last equity injections stabilised ratios at very low levels, but are still a constraint,” he said in December. “Nuclear generation would severely leverage Eskom’s balance sheet without additional equity injections.”
Referring to the “injection”, Treasury said the R23-billion equity injection and the conversion of the R60-billion subordinated loan to equity helped shored up Eskom’s balance sheet.
“State-owned companies are responsible for much of the infrastructure on which the economy relies,” Treasury said. “Eskom, Transnet and … Sanral account for about 42% of public-sector capital formation.”
“Over the past year, Eskom continued its capital investment programme – bringing new generating capacity to the electricity grid – and maintained steady power supply. Transnet continued to invest in getting more freight from road to rail.”
Meanwhile, contingent liability exposure to independent power producers (IPPs) is expected to decrease in 2019/20.
“Government has committed to procure up to R200-billion in renewable energy from IPPs,” Treasury said. “As at March 2017, exposure to IPPs – which represents the value of signed projects – is expected to amount to R125.8-billion. Exposure is expected to decline to R104.1 billion in 2019/20.”
Government began to categorise power-purchase agreements between Eskom and IPPs as contingent liabilities in 2016.
“These liabilities can materialise in two ways. If Eskom runs short of cash and is unable to buy power as stipulated in the power-purchase agreement, government will have to loan the utility money to honour its obligations.
“If government terminates power-purchase agreements because it is unable to fund Eskom, or there is a change in legislation or policy, government would also be liable. Both outcomes are unlikely.”
It said Eskom is expected to use R43.6-billion of its guarantee in 2016/17 and R22-billion annually over the medium term.
It said SAA has used R3.5-billion of a R4.7-billion going-concern guarantee, with the remainder likely to be used in 2017/18.