Forget silver linings! Gold is comfortable above $1 000 per ounce
Every cloud has a silver lining. This English idiom suggests no matter how bad things get, there are always better prospects to turn our attention to. With gold holding steady above $1 000 per ounce we could apply this saying to the South African gold mining industry. The country’s major mining outfits could be in line for record profits if gold stays the course. Of course the world of economics is never this simple. Patient investors who bought gold in 2001 and stepped away from the market until today won’t be complaining. But those who attempted to time their entry and exit to the precious metal will have struggled. Gold has fluctuated wildly since first breaking through $1 000/ounce in March 2008. By November of that year it was treading water at $710/ounce before zigzagging its way back to current levels.
Why is gold climbing again?
Does gold’s latest rally mean our long-suffering gold mines will finally report decent profits? Before we answer this question we must consider why gold is fetching such high prices. Most economists pin gold’s recent rally on the ‘soft’ US dollar. As investors fret over the devaluation of the world’s ‘favourite’ currency they’ve been snapping up gold. So, while gold surged through its previous high of $1 032.70/ounce the US dollar fell to a one-year low. Talk that Gulf-based oil producers (backed by China, Russia, Japan and France) want to dump the dollar in favour of another currency for trading oil put the dollar under further pressure. And it wasn’t long before the gold bulls were suggesting gold as the perfect ‘currency’ for this purpose. Gold, they argued, has no country affiliation and had been used for years to underpin various currencies. The detractors weighed in with claims the metal was simply too volatile.
We doubt these rumours will ever play out, but it doesn’t matter, because gold prices will remain strong for as long as the dollar is weak. With the debt overhang in the US economy we expect this situation to play out for quite some time. The golden future is slightly different for South Africa. Local mines cannot get too carried away with high US dollar gold prices because their revenues (and expenses) are calculated in South African rand. Factor in the strong improvement in the rand/dollar exchange rate and gold’s surge loses some of its impetus. What does the future hold for South Africa’s gold mines? A lot depends on the ongoing demand for the precious metal. Right now investors cannot get enough of the stuff!
South African investors are stockpiling the precious metal
A perfect example of the precious metal’s popularity is the locally listed New Gold Issuer Limited exchange traded fund (NewGold ETF). The NewGold ETF is managed by Absa Capital, which reported $1.7bn under management at the end of September 2009. The ETF now holds 52.584 tonnes of gold bullion! Vladimir Nedeljkovic, Head of ETFs and Index Products at Absa Capital said the strong gold price and ongoing investor caution continued to drive interest in NewGold. “Investors are favouring direct investment in gold as it is less volatile and better performing than investment in gold shares,” he said.
But its too late for Pamodzi Gold
Gold mining is a tough business. South Africa is simply unable to produce gold at costs comparable to major mines in the rest of the world. Although many of our mines produce gold profitably it doesn’t take much for an operation to fall on hard times. Pamodzi Gold is the latest example! The company’s ‘final’ press released was short and to the point: “Further to the announcement released on SENS on 18 September 2009, shareholders are advised that a final liquidation order was granted against [Pamodzi Gold] this morning, 6 October 2009, in the North Gauteng High Court in Pretoria.”
The gold miner was listed on the JSE in 2006. It employed approximately 15 000 people to operate and mine three key mining assets. Despite record gold prices the only thing the company racked up in the next three years was debt – a cool R1.5bn of it! Peter Major, a mining analyst at Cadiz Corporate Solutions told miningmx.com what went wrong. “This company was a disaster waiting to happen from the moment it was conceived,” said Major. “They were under capitalised, they didn’t have enough good management and their assets were very old and almost run down into the ground.” He said this was typical of mining start-ups through a commodity bull market. The Pamodzi Gold business model relied too heavily on continuous (and aggressive) increases in the gold price. Two of the groups operations have already been sold. Harmony Gold scooped Pamodzi’s Free State assets while Aurora Empowerment Services acquired the Orkney mines. The preferred bidder for the remaining East Rand mines should be finalised this week.
What does this mean for Pamodzi shareholders? Well – they join the back of a long queue – and will have to wait for the liquidators to slice and dice the company’s assets before (hopefully) receiving a few cents for every rand invested. If you have to invest in gold then the NewGold ETF mentioned earlier remains one of your best options. Each unit is the equivalent of 1/100th of an ounce of gold and comes without the myriad risks associated with direct investment in gold mining companies.
Editor’s thoughts: The arguments for investing in gold are as old as the precious metal itself. If you ask a room full of market analysts you’ll encounter a range of opinions. There are those who swear by gold – and those who will never touch it! Is there a case for investing in gold, or do you prefer diversified resource companies? Add your comments below, or send them to [email protected]
