Gold has reached its highest level in 28 years, breaking the psychological level of $800 an ounce. But despite this, the share prices of gold companies have not benefited, with the gold mining index down more than 17% in the past year. Harmony in particular has been under pressure, falling 40% this year.
The reality is that mining gold in South Africa is very expensive; most of it is deep-level mining, with increased costs and risks.
Recent threats by unions to close gold mines following several high-profile accidents and fatalities have also weighed upon the sector.
Ore grades have been declining as gold mines approach the end of their life cycle. In the Eighties areas like Witwatersrand were producing 14g of gold a ton; today the miners are lucky to find 6g a ton. Much of South Africa’s gold was mined and sold at lower prices, and today there is more gold sitting on the surface in the vaults of central banks across the world than there is in the ground.
Fund managers wanting exposure to gold have preferred to focus on actual bullion by investing in Absa’s New Gold exchange traded fund, which provides exposure to gold without the costs of mining it.
The $800-an-ounce gold price was last seen in 1980 when gold reached $850 on January 21 1980. The rise was meteoric, running from $559 on January 2 to $850 19 days later. But by the end of January 1980 the metal was trading back in the $600 range.
In 1997 a large asset management company said it would never expose itself to gold again. It was a good call, because the metal was trading in the $300 range and fell to a low of $250 by mid-1999, bouncing around at this level until 2001. However, one also learns never to say never.
This is what four professionals remember about gold’s heyday:
Clem Sunter ‒ former chief executive and chair of Anglo American Gold Division
“I was a junior assistant to the managing director of the Transvaal gold mines of Anglo American, working on the Ergo project, treating sites on the East Rand. We did a feasibility study in 1975 based on a gold price of $106. By the time we got the go-ahead in 1977 gold had reached $400 and then it hit $800. We made back our capital in 18 months. The average price for 1980 was around $621.”
Sunter says Anglo American was producing eight million ounces a year at the time. At $800, that meant revenue of $6,5-billion at a cost of only $1-billion. “I think for a few weeks during that period our gold and uranium division had the highest cash flow of any company in the world. It was real euphoria.” But Sunter says no one at Anglo believed it would last. “The reason was high inflation and high oil prices. Gold is seen as an inflation hedge, but we did not expect those conditions to remain.”
Gold came down fairly quickly as oil prices fell, interest rates were hiked and investors moved away from gold — which provided no interest income — and went back to currencies. Sunter says we are seeing a situation now that is similar to the late Seventies and early Eighties, with growth slowing in the world economy, falling real interest rates, fears of further credit blow-outs and exceptionally high oil prices. “In a more uncertain world, people move to gold.”
Veteran stockbroker David Shapiro of Sasfin
“The JSE was built on gold. On November 8 the JSE turned 120 years old. It was formed in 1887, a year after the discovery of the first gold field, and for a hundred years gold was the major sector,” says Shapiro. So it makes sense that when gold reached its peak in the 1980s it ignited the whole market. “It was pandemonium in the Eighties. There were about 40 gold shares quoted and it was boom time for the country, with gold our biggest export. It created huge inflows and therefore had a significant influence on our economy. Today when you look at asset managers’ holdings, gold makes up no more than 5% of the portfolios. Gold is now only our third-largest export, far behind platinum and coal.”
Shapiro says that in the Eighties the South African stock market had just come out of a torrid time. “I joined a brokerage in 1972 and then we had the 1976 riots. We hardly made any money; there was no brokerage fee. When the Eighties came, it gave us a sense of relief, something to hold on to.” But that was short-lived, as the famous Rubicon speech in 1984 saw the country unravel. Gold began to recover in 2002 and the price has since grown at 18% a year.
Dawie Roodt, economist at Efficient Group
“A friend of my father was buying Kruger Rands because he believed it was going all the way to $1Â 000. I learned a lesson then. When prices are going up, many analysts will argue that prices will go on forever, that they can’t go wrong. When it changes direction, everyone thinks it is going to fall to nothing. People get caught up in a new trend.” Roodt says in the early Eighties South Africa was the richest it had ever been in terms of income per capita.
Cees Bruggemans, economist
“In a speech, Reserve Bank governor Gerhard de Kok said that the gold price had reached permanently high levels. The price was seen as permanent, rather than recognising it was a peak and not sustainable. The fiscus raised tax revenues from gold mines at extremely high levels and created the impression that there would be less of a tax burden on individuals. However, it was a passing phase.”
Bruggemans says the country was in the grip of a fever: property was booming, the stock market was staging a massive recovery and policymakers thought things would remain that way forever. Today, the real boom is in the investment inflows that offset our deficit. He says the irony is that, while precious metals make South Africa a more attractive investment destination, giving strength to the currency, the country’s long-term trade competitiveness undermined.
Tony Barrett, head of wealth planning at BJM
“There was a good feeling, things were going well. Sanctions had just come in, but we were still naïve enough to believe we could do it on our own. We had a feel-good factor from being isolated, like an ostrich with its head in the sand,” says Barrett, who adds that gold was a huge leverage factor and one could gain exposure through gold shares or Kruger rands.
Kruger rands became an easy way to get money out of the country as the political situation deteriorated. He says other precious metals like platinum were also doing well, and because of these profits and exchange controls, which prevented mining companies from expanding globally, a company like Anglo American became a proxy for the market. It owned all sorts of companies that had nothing to do with mining, such as OK Bazaars and Lion Match.