Madeleine Wackernagel
The world’s central banks hold 28 years’ worth of gold supply, and signs are they are not going to step out of the market in a hurry. First Australia, then Russia and the Swiss, and now the Germans have sold down their reserves in the past few months.
Other European central banks could follow suit as they battle to meet the budget deficit criteria to qualify for monetary union in 1999. Once European Monetary Union is in place, a European Central Bank will be established, backed by substantial gold reserves. Thus the threat of further sales looms large in the next 12 months.
The worry for South Africa is the potential blow to jobs, in an industry already undergoing massive restructuring.
Says Tony Twine, economist at Econometrix: “At the $310-$320 level, between 70 000 and 80 000 jobs are at risk.
But the last time gold traded at those prices, the exchange rate was R4,66 against the dollar; this time it’s more like R4,85. So the rand price of gold is little changed, giving us some breathing space.
“But the industry has been facing the same problems for the past 20 years. Resources are limited, and often not economical to mine.”
Since the halcyon days of the early 1980s when bullion was trading at $800/oz, the mineability of reserves has been extended beyond the 2020 time-frame envisaged in the 1970s.
The worry now is that if the price falls much below the critical $300/oz level that horizon will once again be in the picture.
South Africa’s mining houses have been actively looking for ways to cut costs, of which labour is only a small part.
Much more significant is the cost of running a mine; the introduction of seven- day mining, for instance, saw a 16,67% drop in the capital cost per unit produced.
And as the industry players go north and west in search of new reserves, the quest for new ways to cut production costs will become even more important.
“Adding to the world’s supply at the same cost structure but lower selling price would be suicidal,” says Twine. “Only those companies that can produce at reduced costs will make money.”
And diversification into other areas of minerals exploration may not always be possible or viable. Some mines will inevitably close unless the price recovers.
Gold may yet regain its traditional role as a store of value against currency crises or inflationary pressures, although the likelihood of either seems rather remote at present. Even the South-East Asian currency turmoil did little to move the price; nor is inflation of major concern in the western economies.
Some analysts see the potential for a currency crunch in post-monetary-union Europe; another possible source of support for the bullion price could be a banking crisis in China.
More likely, though, is little change to the present trend, with slow increases to about $325 by the end of next year.