GOLD INDUSTRY:
A PRICE-TAKER
AND OTHER
ECONOMIC
CONSTRAINTS
Gold is unique among the world’s commodities. It neither
rusts nor decays, meaning 98% of the 174,100 tonnes of
gold ever mined can be accounted for.
The buyers of gold
Of all the world’s metal markets, the market for gold is the
most transparent and measured. According to the most recent
figures (for end-2012) compiled by GFMS, of the 174,100 tonnes
49% was in the form of jewellery owned largely by private
individuals. These individuals held a further 20% in the form of
unwrought bullion.
Both these forms of gold may be viewed as investments or
as holdings that represent a store of value. A further 17% was
held by central banks and other official holders such as the
IMF. The remaining 12%, according to GFMS, was tied up in
fabricated form or in the hands of fabricators. This leaves 2%
lost or unaccounted for.
AngloGold Ashanti I Gold Fields I Rand Uranium I Harmony Gold
Evander Gold Mine I Sibanye Gold I Village Main Reef
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Key definitions and acronyms
Price takers – companies that are not able to influence or
affect the price of their product in the market, such as gold.
IMF – International Monetary Fund: an organisation
of 188 countries that works to foster global monetary
co-operation, secure financial stability, facilitate international
trade, promote employment and sustainable economic
growth, and reduce poverty.
Liquid markets – a market in which assets can be sold and
bought easily without significantly affecting global demand,
price or value of the asset, and where buyers and sellers
are readily available.
GFMS – Thomson Reuters GFMS: a London consultancy
which focuses on research in the precious metals markets
and produces regular reports on these.
Sterile investment – an investment that does not provide
dividends or interest, but may grow in value through price
appreciation.
Spot price – the current price at which a commodity can
be traded.
ETF – exchange traded funds: a fund that is traded on the
stock exchange. A gold ETF would provide an investor
direct exposure to movement in the gold price without
holding a particular company’s equity; in other words, it
offers the investor the opportunity to invest in gold bullion
as it tracks the price of gold.
LBMA – London Bullion Market Association: an international
trade association that represents the wholesale market for
gold and silver. The group is based in London and its work
includes refining standards, best practices and document
standardisation.
London Gold Fix – the process by which the price of gold
is fixed twice each business day on the London market.
This is done to fix prices for contracts between members
of the LBMA, and is also used as a benchmark in other
world markets.
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Unlike other precious metals such as platinum, gold is not
an industrial metal – its attraction lies in its history as a store
of value, as a currency or as adornment. Demand, then, can
be construed as broader than the trade of a single year and
be extended to include the stocks held as a preserver of
wealth. In 2012, for example, according to GFMS, fabrication
demand totalled 2,613 tonnes. Of this amount 1,893 tonnes
were transformed into jewellery, essentially a store of wealth
in certain and uncertain times. Industrial demand, largely for
the electronics or specialty chemicals industries as well as
for dentistry, is therefore far smaller than might appear at first
glance.
Still in 2012, central banks, largely in emerging market
economies, added a net 550 tonnes to their official holdings.
Central banks no longer buy and sell unlimited amounts of
metal at fixed prices. The US Federal Reserve did so from
1934, to hold the price at $35 an ounce. That strategy came
to an end in 1972 when gold on the open market started to
move ahead of $35/oz. Since then the gold price has been set
by interplay between the free markets of America, Europe and
the Far East.
In 2012, global new mine production was estimated at
2,840 tonnes. For any other metal, a narrow productionconsumption pattern, represented by fabrication and central
bank demand, would likely have sent prices stratospheric.
This is where gold differs from all other metals. The end-2012
above-ground holdings – equivalent to more than 60 years
of current mine production – ensure that, at a certain price,
releases from stocks will make good any shortfalls between
current demand and new production.
In recent years, new demand for jewellery fabrication has been
closely matched by supplies of scrap metal. In other words,
much of the demand in the jewellery sector is essentially an
exercise in recycling. Net demand – the difference between
actual purchases and scrap metal sales – is a better measure
of the state of the jewellery market.
Since the financial crash of 2008 investment demand has
been among the gold market’s principal drivers. In 2012,
on GFMS’s reckoning, investment demand (physical bars,
coins and ETF holdings) absorbed a net 1,605 tonnes, 1.6%
down on 2011, but still the second highest on record. ETFs
increased their holdings of physical gold by 272 tonnes
in 2012. As an indication of the gold market’s volatility, in
the first three months of 2013, net sales by ETFs totalled
177 tonnes, which is greater than the total output of South
Africa’s mines in 2012.
“Net demand – the difference
between actual purchases and
scrap metal sales – is a better
measure of the state of the
jewellery market.”
6909_13 FS GOLD INDUSTRY 27ES.indd 2
WHY DO INVESTORS AND SPECULATORS BUY AND
SELL GOLD?
Back in the late 1970s and early-1980s, the fear factor was
inflation. Since the financial debacle of 2008 a large factor has
been fear of recession. In recent years the metal has been seen
as a safe-haven in times of economic uncertainty. Unlike other
investment possibilities, gold is sterile, offering no investment
returns such as dividends or interest. Investment or speculative
demand is driven largely by expectations of future price rises.
A further consideration in purchase decisions is the opportunity
cost of holding a sterile investment. While interest rates have
remained low and the rich world’s central banks have resorted
to quantitative easing to head off the possibility of a deep
recession, the opportunity cost of holding gold has been
comparatively low. However, analysts believe that the situation
could reverse should interest rates be raised in response to a
resumption of inflation, or if economic growth results in higher
corporate profits leading to stronger share prices.
There is more than enough gold that can be released from
private or official holdings to ensure that the gold market is
liquid, or well supplied. In 2012, when more newly-mined
gold was produced than in any other year, the 2,848 tonnes
delivered by the world’s mines increased global stocks by a
mere 1.6%. On the other side of the coin, investors, speculators,
jewellers, central banks, industrial users and fabricators bought
4,406 tonnes at a total cost of $236 billion – at prices set in
London averaging $1,669 an ounce. Demand in 2011 was
greater – 4,582 tonnes at an average price of $1,571 an ounce.
Even as global production reached another record high, the
world’s mines only produced 65% of the gold traded in 2012
– the remainder came from recycling, scrap and releases from
investment holdings. If the world’s mines to close completely,
there is enough gold in stocks to satisfy demand for 40 years.
In the wake of gold’s all-time price peak in September 2011 of
$1,921 an ounce, investors have been lightening their holdings,
particularly when prices have fallen sharply as they did in April
2013. A net sell-off by ETFs of 177 tonnes in the first quarter
of 2013, contributed to sharp, short-term price falls. As pricetakers there was nothing the gold mining industry could do to
counter the price moves.
Price takers
Unlike the markets for most other metals traded around the
globe, no single supplier or group of suppliers and no single
buyer or group of buyers is sufficiently powerful to be able to
influence gold’s price for long. The gold market is among the
world’s most transparent and most efficient with spot prices,
and to a lesser extent futures prices, determined throughout
the day in London, Hong Kong, Zurich and New York.
The price of gold is influenced by a myriad of factors of which
investment demand has been a notable driver since the global
financial crisis of 2008. Individuals seek gold for its safe-haven
in an uncertain world. Demand has been patchy across the
globe, with greater demand by Chinese and Indian buyers
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often offsetting lesser demand by investors in the developed
economies, while demand for an investment that offers no
direct returns has been helped by negative real interest rates
that limit the opportunity cost of holding gold.
Opportunity cost cannot be measured precisely – it is the
effective cost of making alternative investment decisions. In
simple terms this means if one were to borrow to buy gold,
the opportunity cost would be the interest levied on that debt.
On the other hand, if an investor were to choose between
holding sterile gold and dividend-paying equities or interestpaying bonds the income from those equities or bonds would
represent the effective opportunity cost of holding gold.
These factors combine to render all the world’s gold mines
as price-takers. The price at which they can sell their product
is set in markets beyond their control. Few mines can afford
to withdraw from the market and stockpile their gold in
anticipation of higher prices in future without running into
liquidity problems or falling foul of their host governments
that count on the foreign (US dollar) revenues generated
by the mines’ gold sales. Certainly, the mines can hedge
their future expected production, but none are in a sufficient
position of market power to be able to negotiate sales at
prices higher than those set transparently in highly liquid
markets each day.
The gold producers
The South African gold industry produced 167.2 tonnes of
gold in 2012 – less than 6% of the world’s newly-mined gold
that year. That 31 tonne drop during the year relegated South
Africa to fifth place in the world production rankings – way
down on the pole position held for decades when South Africa
produced almost 80% of the globe’s newly-mined gold. The
country’s 2012 production was reduced by around 20 tonnes
by strikes and, though to a lesser extent than in 2011, safety
stoppages. Even in 1970, however, South Africa mines could
not influence gold prices and were obliged by agreements
with the world’s central banks to sell virtually its entire annual
gold production to them.
While demand for all other metals is subject to changing
technologies and economic developments, there is always a
market for every ounce of the world’s newly-mined gold.
If more or less is needed for manufacturing, the change
will be made good by net transfers to and from investment
holdings.
The counterpoint is that the price miners receive is determined
in US dollars in the major gold markets of Asia, Europe and
America – daily and around the clock. In London, the world’s
prime physical or spot market, prices are set or fixed twice each
working day on the basis of daily buying and selling orders of
the clients of the five bullion dealers, which participate in the
London Gold Fix. The moment the morning and afternoon price
fixes are agreed, every last ounce of gold available for trading
at the fix price changes hands. In Hong Kong, spot prices are
6909_13 FS GOLD INDUSTRY 27ES.indd 3
“These factors combine to
make all of the world’s gold
mines price-takers.”
fixed by a combination of open outcry and electronic trading,
while in New York trading is almost entirely paper-based for
spot and futures settlement.
The South African gold industry’s fundamental strategy is
underpinned by the knowledge that individual mines cannot
influence the gold price. If a mine were to close here, its closure
would perhaps cause a mere blip in the gold price.
As gold prices weaken or consolidate, South Africa’s gold
mines remain under pressure. Their only means of remaining
profitable and even of remaining in production is to contain
costs, to be cost-effective and operationally efficient. In 1970, the
country’s mines’ reached their peak, producing 1,000 tonnes of
gold in a single year. Since then South African gold mines have
been in decline as falling ore grades and the cost pressures of
mining at increased depths have eroded margins. Managing
costs will be crucial to South Africa’s future as a gold mining
country and to its economic future as a whole.
As is the case in every other free-market gold-producing
country, South Africa’s gold miners’ focus is on producing as
much gold as cost-effectively and as profitably as possible,
within the strictures of their ore reserves and within the
parameters of respect for the environment, for employees and
for host communities.
In the ten years from 2002 to 2011 (when gold prices rose
to dollar-denominated peaks and the recovered ore grades
declined), operating revenues per tonne of ore milled rose by
68% while operating costs rose by 63%. Revenue and unit
costs rose by 270% and 249% respectively. Since 2011, gold
prices have fallen and costs of important inputs such as wages
and electricity have continued to increase.
The industry’s success and its ability to maintain jobs depends
on controlling costs and matching any increases with
productivity gains. The country’s gold mines cannot rely on
rand-denominated gold price increases offsetting rising rand
costs in perpetuity, particularly with a scenario of declining
ore grades and with an estimated 37% of the nation’s gold
production being produced at a loss at the start of 2013.
The industry’s responsibility to the country as a whole is to
remain profitable by firmly controlling costs. A dismal alternative,
if cost increases are not matched by productivity gains, is more
shaft closures and job shedding.
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GOLD MINES COST CURVE (2012)
A bleak picture
On a total production cost, plus capex, basis with a price of R423,000/kg
for the gold industry if costs are not controlled
800,000
700,000
600,000
500,000
400,000
300,000
Harmony
Revenues
AngloGold
Ashanti
South
Deeps
Total costs before capex
KDC
Beatrix
From the Chamber of Mines’ figures for the fourth quarter
of 2012 – based on cash costs and an average gold
price of R509,783 per kg – about 45% of gold mines
were unprofitable or at best marginal. If one assumes that
80% of capital expenditure is sustaining, then, if one adds
production costs plus sustaining capital expenditure,
100% of the industry is loss-making. This is a crisis.
Total costs including capex
Source: Chamber of Mines
AT A GLANCE
2011
2012
4,582.3
4,405.5
1,972.1
1,908.1
Technology
452.9
428.2
Investment
1,700.4
1,534.6
456.8
534.6
2,836.4
2,847.7
180.2
154.2
Gold demand (tonnes)
Of which:
Jewellery
Central bank net purchases
New mine supply (tonnes)
Of which:
South Africa
Source: GFMS
Contact details
Elize Strydom
Senior executive: employment relations
Tel: 011 498 7409
Email: [email protected]
6909_13 FS GOLD INDUSTRY 27ES.indd 4
Charmane Russell
Communications consultant
Tel: 082 372 5816
Email: [email protected]
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