By: IOL

South African gold mining companies are making gains as gold prices surge to record highs, driven by the US government shutdown and expectations that US interest rates will be cut soon.

Gold surged to a new high on Wednesday, just shy of $4,000 (R68,909) an ounce and was trading 0.43% up on the day by mid-afternoon.

As a result, South African mining stocks benefited. By early afternoon on Thursday, mining stocks were up 0.68% and had gained 7.04% for the week.

Although there isn’t a gold index on the bourse, companies like DRDGold, AngloGold Ashanti and Harmony are all benefitting from what Dr Azar Jammine, director and chief economist at Econometrix, calls the "psychological effect" of rising gold prices.

Gold has a long history in South Africa, which was once the world's biggest gold miner, losing that crown to China in 2006. The country is no longer even in the top ten producers. Gold's history in South Africa dates back to the late 1800s, when a gold rush saw a shanty town develop in what is now Johannesburg.

US pain is SA’s gain

The rally comes as the US government shut down many of its operations at the start of the month after Congress and the White House failed to reach a new funding deal, Andre Cilliers, currency strategist at TreasuryONE said.

Matt Simpson, senior analyst at City Index, was quoted by FX Leaders as saying that the shutdown is driving investors toward safe-haven assets like gold as political gridlock raises concerns about fiscal stability.

Deon Gouws, chief investment officer at Credo Capital, said that during shutdowns, the US Federal Reserve tends to become more dovish, meaning more willing to cut rates. "Something which is obviously positive for all financial assets," he said.

According to the CME FedWatch tool, traders are now pricing in a 100% chance of a quarter percentage point cut this month.

What actually shuts down?

Gouws pointed out that the actual impact of a government shutdown is limited.

The shutdown affects the collection and reporting of economic data, visitors' centres at parks and monuments, and small business loans, he said. Medical research will also stop partially.

But federal courts, mail services, passport offices and all forms of public transport, including air traffic control, will operate without interruption, he said.

"On balance, markets do in fact tend to react favourably to a government shutdown, especially when it doesn't take too long to resolve," Gouws said. US equity indices reached all-time highs this week, he noted.

The rand has been trading stronger and is supported by suggestions of an extension of the African Growth and Opportunity Act trade agreement with the US, the soaring gold price, and a weaker dollar, Cilliers said.

The local currency was trading at R17.25 this afternoon, having reached a one-month low on October 1 just as the shutdown took effect.