Pullback in Gold Supply ‘could boost bullion price’

July 3, 2013 at 07:38

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The price of gold continued to rise for a third consecutive day after recent sell-offs as bullion lost it safe-haven allure‚ placing gold miners at an ever-increasing risk of running at a loss or shutting down.

The price of bullion has fallen 25% in 2013‚ the worst drop in more than 30 years.

This is as a result of the US economy recovering and a tapering off of monetary stimulus becoming a possibility in the near term.

This has led to dollar strength and a decline in the dollar-denominated price of the metal.

Market participants are now awaiting a US jobs print on Friday‚ which should shed further light on the health of its economy.

“Reduced economic risks‚ lower inflationary pressures and a hawkish Fed are more than enough to explain this year’s 25% decline in the price of gold‚” said Rezco Asset Management director Rob Spanjaard in Johannesburg.

“Gold equities have significantly underperformed in a rising gold price environment in recent years and thus with the gold price coming under continued pressure one would expect the gold names to underperform as has been the case. Many of the tailwinds that underpinned the decade-long rise in the gold price have started to turn into headwinds‚” he said.

“Considering the current gold price environment gold equities have had to shift to a focus of cost cutting and capex curtailments so they can mitigate the negative effect of the weaker gold price on their operating margins‚” said Mr Spanjaard.

Meanwhile investors remain cautious about the long-term outlook for the sector as higher costs and falling prices and output curb investor demand. This lack of demand would likely be a stumbling block for gold equities looking to raise capital on the JSE.

Mr Spanjaard said because of the weakness in the gold price most of the South African gold miners had moved away from more capex-intensive greenfield projects.

“Currently our gold miners remain profitable as the emphasis on cost cutting and capex curtailments support cash margins at present. I would think a gold price below the cash cost of production of $1‚000/oz would erode cash margins and thus render our gold mines loss making‚” he said.

However‚ IG SA market analyst Shaun Murison said it appeared as though South Africa’s gold miners’ cost of production ranged from $1‚100/oz to $1‚400/oz depending on age‚ health and quality of their respective mines.

“Difficult mining operations such as Gold Fields’s South Deep battle ore deposits 3km underground and find their costs nearer the upper end of the aforementioned range‚ while some of the smaller producing junior miners such as Pan African Resources‚ which operate in shallower mines‚ can extract gold at costs closer to the lower end of the range‚” he said.

“Unfortunately Africa battles among the highest costs in the world in terms of gold mining production‚” Mr Murison said.

“When we consider that locally‚ input costs such as electricity and labour are adding inflationary pressures while gold declines in value‚ it would make sense for local producers to reduce capex spend on things such as exploration‚ shut down more expensive shafts‚ lower production and make redundancies‚” he said.

Globally, though‚ the price of gold at present negatively affects margins for all miners.

“Perhaps a pullback in supply could catalyse a significant increase in the spot price of the precious metal‚ especially if the recovery in the largest economy in the world starts to show signs of faltering‚” he said.