The David Gleason Column
Gold, the precious metal most commonly associated with South Africa, is in the way of taking yet a further beating after the United Kingdom’s Chancellor, Gordon Brown, announced last week that Britain is to sell off about 415 tons over the next three years.
An extraordinary aspect of the British announcement was the way it delivered its decision. Most central banks which decide to reduce significantly their bullion reserves announce this after they’ve made their sales (as Australia did two years ago).
All the Bank of England has done is to drive down the price of the very commodity it now hopes to sell, presumably at good prices. In its defence, some commentators say that at least the UK sales by auction will be transparent.
I cannot, for the life of me, see what good that does. If, for some perverse reasoning, the bank thinks it clever to deny taxpayers $10 an ounce (roughly the extent to which the gold price has fallen since the British announcement) it will certainly get its wish. Ten dollars an ounce may not sound much but over 415 tons it amounts to something like a cool $135-million.
South Africans need to be concerned because of the primary role gold mining continues to play as an employer of labour. At its apogee in 1986, the industry employed 534 000 personnel. Since then, and as gold’s role has been steadily reduced, so much of South Africa’s production has become uneconomic. As production fell, so did the labour force needed to mine it. By 1997, the labour force had shrunk to 321 000.
Economists believe every man employed in the mines effectively supports a further 10 people, either indirectly in the rural areas or through the secondary industries which have grown up around the various gold fields. Presuming that’s correct, the cold statistics mean that over the past two decades more than two million people have had to find sustenance from some source other than gold mining. In a country in which job destruction and economic contraction are commonplace, this is where the real pain has had to be absorbed, not in fancy numbers or in economic theory but in the reality of poverty.
And, given the state of the market, it’s hard to see how it will recover. Over the past 10 years the grip of the bears has steadily tightened. Central bankers, who really should know better, have allowed their stock of bullion to be used for lease purposes on the flimsy pretext that it’s better to earn 2,5% from a silent asset than nothing. What none of them admit publicly, however, is these loans have contributed to bullion’s steady price decline. And of what value can it possibly be to earn a pittance on the income statement while the asset’s value in the balance sheet falls by $40 an ounce or more?
What is now needed is a complete about-face in the way gold’s role in commerce is measured and understood. We all know that gold remains a store of (declining) value. We also know its role as a monetary instrument has been steadily debased over the last decade (except when it suits the merchant bankers for whom its cheapness and ease of access has become legendary).
Gold Fields chair Chris Thompson, who takes grave exception to the manner in which gold’s supply and demand patterns are measured, believes new methods of evaluating gold’s role are urgently necessary.
As an example, American housing stock (about 95-million units), like gold, has a vast store above ground. Like gold, this stock is added to every year (about 500 000 new houses annually in the United States). And, like bullion, property and land are perceived to be permanent stores of value. Gold needs to be reassessed along similar lines.
The long term transfer of gold from central bank to private ownership really should not come as any great surprise (most gold is already held privately). Yet there seems a pervasive fear, fuelled happily by gold bears, that the 30 000 tons in national treasuries (most of it in the US, French and German central banks) will be released in a deluge.
There’s not much chance of that but as long as the threat remains, so gold will stay trapped in a relentless price decline. This isn’t helped either by producers who hedge out sales of their future production, in some cases by as much as 12 years ahead. It may give short-term succour and make some mines appear illusorily profitable, but it is really slow-acting poison because all it really achieves is to make increasing quantities of unmined gold uneconomic.
I know what I urge is easier said than done and may appear a pious wish, but producers need to put their differences aside and devise a long-term strategy which stands the industry on its head and enables it, after years of debilitating price contractions, to expand. Failure to do so means another decade of shafts closing, falling output and ever fewer jobs.