FACT SHEET:
ECONOMICS
OF GOLD
A SOUTH AFRICAN GOLD MINING INDUSTRY INITIATIVE
Gold’s story is not a new one, but for all the
changes in the world, its story is the most enduring.
A currency, an adornment, a store of national and
personal reserves and now technology – gold has
evolved through the ages and is today in demand
as much as when it was first discovered. Gold’s
scarcity and versatility have guaranteed it a place in
our financial world as the ultimate store of value, it
represents a constant in the midst of economic and
social change.
CURRENT TRENDS
GOLD MARKET FUNDAMENTALS
Value is often closely linked to scarcity.
This suggests that the less there is of a
commodity, the higher its price. This is
true for many markets but gold is driven
by more than simple supply and demand
market fundamentals. The GoldSeek
website* uses the analogy of the sea and
the shore to explain the main forces at
play in the gold market. Three elements
have an impact on the market and hence
the price of the precious metal – the
waves, the tides and the overriding
SCARCITY
Gold was first used ornamentally because
it is malleable and ductile. One ounce of
gold can be stretched to form a wire (of
5 microns) that would extend nine times
the height of Mount Everest. Due to golds
Around 85% of all the gold ever mined
currents. Applying this to the gold market,
can still be traced. If all the gold ever
the waves represent the short-term, day-
mined were made into one solid cube,
to-day moves of the gold price driven by
that cube would only measure 20 metres
speculators, traders, high-speed trading
by 20 metres by 20 metres – just over
and the triggering of stop loss protections.
8,000 cubic metres.
Larger trends, or the tides, can be defined
rarity fungibility and its enduring nature i.e.,
That’s one measure of this precious
does not tarnish or fade, the metal is the
metal’s scarcity. As there has been
perfect material for money. Its value has
a marked decline in the discovery of
contributed to the shaping and celebration
new deposits, and because grades are
of civilizations. Wars have been fought for
decreasing, as higher grade mines are
gold and the precious metal is still used as
exhausted gold is set to become even
an expression of love.
more scarce.
by the short- to medium-term technical
picture of the gold price, which is driven
by price factors governing mining, scrap
sales investment, buying/selling as well
as temporary factors influencing the
gold price directly, such as government
*http://news.goldseek.com/GoldForecaster/1383336000php
page 1
FACT SHEET:
ECONOMICS OF GOLD
regulations to curb gold imports. Then
China absorbing 1,120 tonnes and India
there are the currents, which reflect
consuming a further 975 tonnes.
the fears in the currency markets and
SUPPLY
Gold supply comes from two sources
However, outflow from exchange traded
– mine production and recycling. World
funds (ETFs) in mid 2013 and lower central
Gold Council data shows that total supply
currencies, particularly the US dollar,
bank purchases meant demand totalled
for 2013 was 4,340 tonnes, which was
which was traditionally pegged to gold.
3,756 tonnes, a dip of 15% from 2012.
2% lower than 2012.
Some of the trends currently being
Fortunately EFT outflows, which saw
tracked by analysts are: the weakening of
positions sold down by 881 tonnes in
the US dollar; out-of-control government
2013, has slowed in 2014, while central
debts interest rates and inflation, deficits
bank purchasing has continued. Central
and gold flowing from west to east. This
banks purchased 369 tonnes of gold last
tidal shift in gold demand to the east is
year, the third year since these national
the most powerful trend to emerge in the
banks swung from being net sellers to
market during the past few years.
buyers of the precious metal.
DEMAND
Purchases for technological applications,
expenditure in 2013 is likely to see this
The buyers of gold have traditionally
which represent around 10% of total
trend reversed in the future.
been individual consumers, investors and
demand, were flat at 405 tonnes. Gold is
central banks. Jewellery consumption
used in electronics, dentistry and other
typically accounts for half the gold available
industrial applications. Ongoing research
and 2013 was no exception. World
into the use of the precious metal in
Gold Council statistics for 2013 show
healthcare is also yielding excellent
that consumer demand, which includes
results. Gold’s unique properties,
investment in small bars and coins, hit a
combined with the advancement of
record high after jewelley demand returned
nanotechnology, means we are finding
to pre-crisis levels. An impressive 54%
new applications in medicine, engineering
of this demand came from the east, with
and environmental management.
geopolitical uncertainty that can influence
cash movements in and out of major
That was despite a 5% increase in gold
mine production to 2,969 tonnes during
the year. This increased supply was driven
by new production coming on stream,
the build-up to full capacity and growth
of existing mine capacity. The uptick
was particularly evident in the later part
of 2013 and has continued into 2014.
A sharp reduction in industry capital
The South African gold industry produced
168.8 tonnes of gold in 2013 – less than
6% of the world’s newly-mined gold
that year. The country’s output declined
almost 2%, slower than the 12% drop
in 2012 when the industry was hit by
wage strikes. Since the 1970s South
Africa has produced close to 80% of the
world’s gold, but in 2006 the country was
dethroned by Australia. It has since been
slipping down the world gold production
rankings where it now holds fifth place
DEMAND FOR GOLD
after China, Australia, the US and Russia.
Net producer hedging activity, another
component of total mine supply, had a
minimal impact in 2013.
De-hedging of existing positions amounted
to just 50 tonnes during the year and the
World Gold Council said there is little or no
evidence to suggest that the lower price
environment would encourage producers
TECHNOLOGY
10%
JEWELLERY
50%
INVESTMENT
40%
to embark on any notable hedging
programmes. “The fact that the outstanding
global hedge book stands at below 100
tonnes, the lowest for over a decade,
provides a further indication that hedging
will contribute little to gold’s supply profile
Source: World Gold Council
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A SOUTH AFRICAN GOLD MINING INDUSTRY INITIATIVE
TOP TEN GLOBAL GOLD PRODUCERS – 2013
going forward,” it said in its report on Gold
Demand Trends 2013.
CHINA
437.3t
AUSTRALIA
259.4t
THE UNITED STATES
226.9t
RUSSIA
237.8t
PERU
182.2t
SOUTH AFRICA
168.8t
CANADA
128.3t
influence gold’s price.
MEXICO
101.2t
BULL MARKETS
GHANA
97.8t
INDONESIA
94.8t
Gold recycling also continued to shrink in
2013 with the annual supply of recycled
gold declining for a sixth consecutive year
to its lowest level since 2008. Price is not
the only factor that determines recycling
levels but the sharp fall in the price earlier
in the year was the key reason for the dip
in 2013.
GOLD PRICES
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
The gold market over the past decade has
experienced a significant bull market. Up
to 2011 prices rallied to new highs and
despite the price coming off 38% from its
Source: World Gold Council
peak. Gold prices have had a strong first
half in 2014. At the midpoint in July, the
take advantage of any recovery in the gold
knowledge that individual mines cannot
yellow metal had gone up 9% in value.
price. Essentially, price takers are compelled
influence the gold price. If a mine were to
That rise has helped position the precious
to accept the price set by the market. With
close here, its closure would cause a mere
metal as the best performer among major
the price out of their hands, the industry
blip in the gold price.
asset classes this year.
has no choice but to manage costs since it
PRICE TAKERS
cannot pass rising costs on to end users.
As price takers, gold producers are crossing
The South African gold industry’s
under pressure. The mines’ only means of
fingers that they will still be in good shape to
fundamental strategy is founded on the
remaining profitable, and even of remaining
As gold prices weaken or consolidate,
South Africa’s gold mine revenues remain
in production, is to contain costs by being
cost-effective and operationally efficient.
The gold price in rand and US dollar terms
R per kg
US$ per oz
600,000
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
500,000
400,000
300,000
200,000
100,000
0
2002
––
$/oz
2003
––
2004
R/kg
2005
2006
2007
2008
2009
2010
2011
2012
2013
Under the current low gold price scenario
South African gold producers, whose costs
are linked to the rand, are at a crossroads.
According to the Chamber of Mines,
the average price received in 2013 fell to
R435,496/kg while total production costs
including capex rose to R450,789 kg – which
means 70% of the industry is marginal or
loss-making after capex. While the gold
industry made a solid contribution in 2013,
the cost pressures remain.
Source: Chamber of Mines SA
page 3
This is Gold is an industry initiative begun by South African gold producers to provide insight into the gold industry, its
processes and its contribution. We aim to provide honest, balanced information that can be used to understand the history
of gold mining in South Africa, the work being done by the industry now and the plans in place for the industry’s future.
HOW IS THE GOLD PRICE
DETERMINED?
However, the gold fix and other financial
Modernisation is imperative to maintain
benchmarks have been under increasing
trust across the industry and this could
regulatory glare in the wake of the Libor
come in the form of reform to the Fix to
rate-rigging scandal, which saw several
bring it in line with the The International
prominent banks fined for attempting to
Organisation of Securities Commissions’
manipulate the benchmark inter-bank
principles or it could see an alternative
borrowing rate.
price benchmark emerge.
five banks that takes place over the
This has prompted a review of the process.
Either way, it looks like the new gold pricing
telephone, is called the gold fix. However,
“The Fixing process was established
system will become electronic, auditable
the gold price is not fixed in the sense that
almost a century ago, so it is not surprising
and transaction-based by the end of 2014,
it doesn’t change. Rather, it establishes
that it needs to change to meet today’s
heralding a new era for the market.
a price at which supply meets demand –
market expectations for enhanced
across all the participating banks. Once
regulation, transparency and technology,”
used for settling contracts between London
says the World Gold Council.
Since September 1919 the price of gold
has been determined twice a day by
members of the London Bullion Market
Association. This price setting, which is
essentially a twice-daily auction between
bullion market members, the gold fix has
become the recognised rate that is used
for benchmarking pricing for the majority of
gold products and derivatives throughout
the world’s markets.
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CONTACT DETAILS:
Charmane Russell
Spokesperson acting on behalf of the gold
producers
Tel: 082 372 5816
Email: [email protected]
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.
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.
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.
page 4
A SOUTH AFRICAN GOLD MINING INDUSTRY INITIATIVE