Donna Block and Mungo Soggot
A number of South Africa’s marginal mines could claw their way back to profitability in the near future as the surging gold price provides a lifeline to the ailing gold industry.
Analysts say South Africa’s gold mines – the deepest, oldest and most expensive to operate in the world – should be among the biggest winners from a sustained price rise because in the past months they’ve had to restructure themselves in anticipation of protracted low prices.
Gold prices have dropped by a third in the past three years as central banks, including those of Australia, Argentina and Canada, sold reserves and on traders’ concerns that other governments would also sell.
The precious metal lost its shine as a hedge against inflation, analysts said, and banks switched to other investments, such as government bonds, that offer higher returns.
But the price of gold staged a stunning comeback this week as the dollar weakened, the demand for gold increased in Asia, and concern mounted about a declining United States stock market.
According to Brenton Saunders, gold analyst at Fleming Martin Securities, a revitalisation of the gold mining industry will hinge on how long the gold price can stay at its current levels.
He said local mines would have to take a wait-and-see attitude before changing their plans in line with the surprise price move.
”I think gold would have to trade at about $330 an ounce for six or more months before they are able to sustain any new labour,” he said. ”But in the meantime there shouldn’t be any retrenchments,” he added.
In just one week the gold market has undergone nothing short of a revolution. The key to the shift in sentiment was the decision last week by leading central banks to announce they would restrict further sales of their gold holdings.
It was the Bank of England’s decision earlier this year to sell off half its gold stock that precipitated a collapse in the gold price to below $255. Last week’s announcement has eased fears about excessive gold stocks flooding the market. Now the market is in rough balance, maybe even in short supply.
Historically, gold becomes the investment of choice in times of economic turmoil. This could mean that investors who are wary of millennium bug turmoil have identified the metal as a safe haven.
Economists have also been speculating about whether the spike in gold is a precursor to higher inflation. As investors lose confidence in the currency system gold becomes increasingly attractive. However, oil, steel and building materials are the commodities that usually signal inflation, not gold.
Just as importantly but less noticeably, the withdrawal of central banks from the gold lending market has engineered what in trading circles is known as ”the short squeeze”.
For many years, any macro hedge fund manager worthy of his bonus cheque has borrowed gold at lease rates of 1% or so to sell short, selling the metal in the hope of a price decline and then buying it at a later point in time for less than the sale price.
They then invested the sales proceeds at 4% to earn the cost of keeping the position on their books. But lease rates have shot up over 4%, so the cost of keeping the position has turned negative. All of which means, the party’s over for the hedge fund boys.
South African economists have warned that the increase in the rand triggered by the surge in the gold price will make South African exports less attractive in foreign markets. Ironically, gold mines will also feel the brunt of a stronger rand as the bullion price is measured in dollars and thus fewer will flow into the mines coffers.
The higher gold price could also help erode the current account deficit and encourage the Reserve Bank to keep interest rates low. Unfortunately the spectacular recovery in the gold price has come too late for thousands of South African miners who lost their jobs in the past few months after mines either shut down or scaled back their operations to shoulder the price collapse.