Cred: Petra Gems
Rate cuts boost demand for non-yielding assets
Diamonds have become just a commodity
Botswana, long dependent on the fluctuating fortunes of diamond exports, is at a crossroads as global consumer preferences pivot towards metals like gold and emerging alternatives such as lab-grown diamonds.
Countries like China, a key market for Botswana’s diamonds are increasingly favoring gold, while major retailers like Pandora, based in the US which is also a key market for local diamonds, are transitioning entirely to lab-grown options.
Several other factors are influencing the situation, including rate cuts and geopolitical dynamics that favor a rush toward metals. This has sparked a heated debate over whether Botswana has entered a fundamentally different economic landscape that requires a shift in its economic behavior. Key questions now revolve around whether the country needs to adapt to this new reality or if a boom is on the horizon that could rescue its economy again.
Economists have found that the diamond sector experiences boom and bust cycles, and because it plays such a significant role in the economy, these fluctuations can drag the entire economy up or down alongside it.
The year 2023 was challenging for the diamond market, and 2024 has followed a similar trend. The pressing question now is: will we see a boom in the near future?
In the past, there was a path to recovery, and historically, the recoveries from those crises have been quite favorable for diamonds, with demand often surging afterward.
Economist Dr. Keith Jefferis is concerned that diamonds have always been a consumer-driven commodity. Over time, diamonds have begun to behave more like any other primary commodity.
Shift to Gold
“What we are seeing is developments which start raising questions about whether this is just a cycle. Diamonds are not the only commodities. What we are seeing in some countries is more of a shift towards gold,” Jefferis, the Managing Director (MD) of Econsult Botswana said in a local podcast.
“In China, there’s been a shift in taste towards gold.”
Central banks have accumulated significant amounts of gold over the past 24 to 26 months, Herbert Kharivhe from Absa's Equity Research revealed during an ETF seminar organised by Absa Bank Botswana in September. According to his presentation, approximately one-third of the global gold supply is now being acquired by central banks.
Kharivhe disclosed that gold miners produce approximately 3,300 tons annually, with central banks acquiring just over 1,000 tons each year. Between 2022 and 2023, their average was slightly above 1,000 tons.
“So overall, central banks purchasing has been quite significant since 2022 and also that is because fiat currencies have been depreciating now,” he said.
Rate Cut Good for Gold
All else being equal, high interest rates are negative for gold, while cuts are generally perceived as positive.
“That is because with high interest rates, the cost of holding gold increases because gold is not a yielding asset and money or assets allocators prefer yield,” Kharivhe said.
The Fed has already implemented the start of its rate cut cycle, shifting its focus from inflation to employment.
Kharivhe believes the backdrop of sticky inflation, geopolitics and slowing global economy is good for gold, adding that the timing of the rate cuts and market expectations around rate cuts will drive gold prices and create volatility in the short term.
Rate Cut to Boost Platinum
The World Platinum Investment Council (WPIC) also expects that platinum investment demand should prove a beneficiary of declining rates as the opportunity cost of holding a non-yielding asset reduces.
In its Q2 2024 report, WPIC indicated that platinum’s investment case is also underpinned by a compelling mix of resilient demand and weak supply, resulting in persistent market deficits with ongoing drawdowns from rapidly depleting above-ground stocks needed to balance the market.
“Platinum prices have on balance yielded positive returns within twelve-months of the US Fed’s first cut in the cycle over the past four interest rate cycles,” Trevor Raymond, CEO of the council wrote.
“Within this context, one would expect sentiment to improve for physical platinum investment products.”
In Europe and North America, WPIC said its partners are operating in an environment of reduced net demand for gold as investors selling back gold products are meeting a large portion of gross demand.
In addition, the rise in the gold price has increased funding costs and stretched retailer balance sheets. The cost of mining gold has also been rising with increased demand.
Consequently, WPIC expects bar and coin dealers to show growing interest in platinum which has lower stock holding costs and provides investors selling back gold with an interesting precious metal alternative.
Kharivhe reckons that metals or gold prospects will remain “higher for longer”.
Shift To Metals Fueled By De-Dollarisation
With a shift towards metals, Quinten Bertenshaw, Co-Founder and Executive Director of the ETM Group found that the US treasuries have been scaled down. “That tells us that the believe in the dollar as the store of value is no longer there,” Bertenshaw said during an FX Risk Management and Africa Trade seminar organised by Access Bank.
Kharivhe has observed that the Russia-Ukraine conflict has fueled the de-dollarisation trend, with Russia losing approximately $40 billion in U.S. Treasuries due to sanctions, along with around $200 billion in European Treasuries. On the back of that, he said this has changed how money flows globally.
“Previously, if you had a surplus in your forex needs as any other country, you would normally park your money in US Treasuries,” Kharivhe said explaining that “after the US and Europe took over Russian holdings, especially the BRICS nations and a few other nations, when they now have surpluses in terms of their fiscal budgets, they are choosing to park those surpluses in gold”.
As a result, he noted that auctions for U.S. Treasuries are not performing as well as they used to. This decline is partly due to countries like China, which historically held close to $1.2 trillion in U.S. Treasuries, unwinding those positions and opting not to add to them.
African Gold Producers in A Fortuitous Position
With BRICS countries purchasing gold, Bertenshaw doesn’t “see it reversing anytime soon”.
“This puts African gold producers in a fortuitous position.”
Botswana Gold Prospects
Gold deposits in Botswana are a tricky subject. Experts say it’s a moving target — as miners recover gold, they continuously drill to determine how much more lies deeper. It appears like they do this approximately every four years. In terms of how much they actually recover, it’s small, especially looking at GDP statistics. Mupane Gold Mine is currently under care and maintenance. An investor has been identified and operations are expected to resume around November.
Statistics Botswana has shown that gold production increased by 1.3% (1.0 kilograms), from 71 kilograms extracted during the fourth quarter of 2022 to 72 kilograms during Q4 2023. The quarter-on-quarter analysis reflects a decrease of 13.5% (11 kilograms) from 83 kilograms during the third quarter of 2023 to 72 kilograms registered during Q4 2023.
The Botswana Geoscience Institute (BGI) has found important minerals like lithium and gold in western parts of Botswana. They surveyed to study the underground geology and assess the mineral potential in specific areas with valuable minerals, including platinum, gold, and base metals.
Copper Still Ripe With Opportunities
Copper has also taken center stage with its outlook continuing to be optimistic, evidenced by the increasing interest in mergers and acquisitions within the industry. This rise in activity highlights the growth potential of copper-related ventures in the future with Botswana eying beneficiation.
BHP recently revealed that it has signed a joint agreement with Cobre Limited, a copper-focused company listed on the ASX, to explore copper and silver deposits in the Kalahari Copper Belt near the Makgadikgadi region of central Botswana.
Major companies like Sandfire Resources and MMG are already active in the Kalahari Copper Belt. MMG recently acquired Khoemacau as the growing focus on green energy and the automotive industry increasing the demand for copper.
Moreover, growth in the global construction industry will boost demand for copper, regardless of the green energy shift. This increasing demand is expected to drive prices up as markets remain in a deficit.
Copper in Concentrates decreased by 6.9% (948 tonnes) from 13,707 tonnes registered during the fourth quarter of 2022 to 12,759 tonnes during Q4 of 2024. Similarly, quarter-on-quarter analysis shows that production declined by 2.5% (322 tonnes) during the fourth quarter of 2023 from 13,081 tonnes produced during the third quarter of 2023.
Copper Industry Won’t Replace Declining Diamond Industry
However, Jefferis fears that “even if you have a booming copper industry that replaces your declining diamond industry, it won't bring in the same revenues or anything like it”.
Diamond revenues bring in the majority of government revenues. During the diamond boom years, Botswana enjoyed a fiscal windfall saving billions of pula in foreign exchange reserves, a combination of private assets and government money through the Government Investment Account (GIA). Both of these were shock absorbers. Botswana has managed to maintain low debt levels by drawing down on the GIA which is mainly accumulated from diamond revenues. Over the years, the government has funded its expenditures—such as health, education, roads, and water—using revenue generated from diamond sales.
The GIA is now almost depleted due to funding deficits, now sitting at about P5.9 billion.
"Essentially we have been on an unsustainable fiscal path for the last two decades. We have switched to a situation of structural budget deficits which essentially means our spending has not come down enough,” Jefferis said adding that those structural deficits are financed using “our savings and we haven't financed them by borrowing and now the savings have gone."
Risk Of Credit Downgrade
Jefferis fears the risk to Botswana’s credit ratings. While he believes it doesn't mean there will be a downgrade, he thinks “we are at a risk of a downgrade because what they are measuring is essentially the public sector sheet."
"When we first got our ratings back in 2001, we had very low debt and had huge financial assets. Since that time, our debt has gone up a bit, but it is the financial assets that have largely been depleted."
‘Nothing Can Replace Diamonds’
With diamonds now falling short, Jefferis believes “nothing will replace diamonds.”
“The diamond sector is big, not quite as big as it has been. The diamond sector is very profitable. It is taxed at a very high rate,” Jefferis said explaining that it has a profit margin of 80% and that profit margin is taxed at 80%.
The reason he says nothing can replace diamonds is that “there's no other activity that has either that profit margin or that tax rate”.
“If you look at a normal industry, or, let's say another mining industry like copper, you should probably have a profit rate of 20%-25% and a tax rate of 20%-25%,” Jefferis said.
Pandora’s Switch To Lab-Grown Diamonds
What worries him even more is the shift toward lab-grown diamonds. While they have been around for some time, advancements in technology are improving their quality. Lab-grown diamonds are increasingly penetrating the U.S. market and are significantly cheaper.
Jefferis cited Pandora, the biggest diamond jewelry retailer in the world. He said they have switched 100% to lab-grown and have stopped buying natural diamonds altogether.
Jefferis said they highlight this shift by emphasising that lab-grown diamonds are environmentally friendly as they are all made with electricity from renewable sources. The company also notes that all their gold and silver, as well as their jewelry, is recycled, highlighting their commitment to being environmentally conscious.
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