- The Gold Forecaster
Gold production in South
Africa could decline by up to 20% this year
Julian D.W. Phillips
Aug 29, 2005
Excerpts from the "Global
Watch - The Gold Forecaster."
Restructuring at S.A.'s gold
mines, together with a continuingly strong Rand forcing the prices
received by the mines to loss levels for many mines and a one-day
strike, hammered South African gold output down 18% in the June
quarter against the same quarter last year, according to Chamber
of Mines figures just released. In April the chamber reported
that S.A.'s gold production fell 8.8% to 342.7 tonnes last year,
the lowest level since 1931. Now take this figure, down 2.4%
on the first quarter and to date the years 's gold production
is dropping below the 400 tonne level, if the second half rises
back to last year's levels. This is most unlikely.
What is more likely is that
the fall off will continue to take annual production this year
from South Africa to 360+ tonnes, a far more than projected drop,
than expected. This is even more significant when one considers
that a weakening Rand is moving off the screens to be replaced
by a steady to stronger Rand. So there is little short to medium
term prospect that gold production will improve. With the prospects
of a "Royalty" still on the screen, it is more likely
that these figures will continue to fall as the South African
mining environment continues to discourage new investment in
India - Gold situation
The Monsoon rains
have calmed, pre-monsoon confidence in the economy has moved
from scepticism to confidence. Gold imports are on the rise thanks
to the slight price correction and the persistence of the current
The biggest problem in the
Indian Gold market is the different levels of the Value Added
Tax to be found in the different Provinces. In Jaipur and Ahmedabad
gold is free of such a tax, so imports are flooding through there
and spilling over into the Provinces like Chennai. So Chennai
dealers are doing "precious little".
This is not a happy situation
and one the government is looking at. In Delhi, the government
is contemplating dropping the tax too, but keep delaying the
decision, leaving markets like Chennai firmly in the hands of
out of town dealers from Jaipur and Ahmedabad where they pay
less tax. But in their hometowns the volumes are still lower
We watch and see if the market
learns to accept these levels and returns to the market. What
must be mentioned is that the overall volumes of Indian gold
importing are rising annually. They will have a greater and greater
impact on the gold market in the coming years.
The U.S. mint confiscates
10 Double Eagles from 1933
Gold Coins are
sent to the Mint for Authentication and seized by them, because
they should never have left there in the first place. Well, that's
their story, but the owners [?] dispute that and are headed to
What makes this story so dramatic
is the value of these coins. The last coin of this type sold
for $7.59 million in 2002, again under contention, with the Mint
taking half the proceeds. It looks like the same path could be
But the historical side is
fascinating, because 1933 was the time the U.S. government ordered
all U.S. citizens to hand over all their gold to them at $20
an ounce. Two years later the government revalued gold to $35
an ounce [whilst the rest of the world was dealing at $20 an
ounce] allowing the U.S. government to suck in the bulk of the
rest of the world's gold until they had over 25,000 tonnes of
it, ready for the second world war.
The underlying principal behind
this thinking is that he who holds gold is relatively independent
of government [as we see in India today] and governments don't
like that, because it makes them culpable and takes away control
of money from them. At that time  trust in government bonds
and other financial instruments was dissipating and government
credibility fast waning. What better road to take than to acquire
as much of the real money the populace respected as they could,
dominate it and so restore that trust in them as owning the only
money alternative to paper. It worked!
In the last quarter of a century,
faced with a global currency problem, this was not so easy so
the U.S. tried to discredit gold as an alternative to the $ by
holding public auctions of it. Few were convinced and as many
as could, bought that gold, forcing the U.S. to terminate their
sales. Then it used its clout to press the I.M.F. into selling
some of its gold too, hoping that the world monetary authority's
action would be more convincing. It wasn't, so they terminated
their sales too. [Hard to convince someone not to respect gold
when you hang onto it as hard as you can.
as the $ was in the ascendancy and imperially becoming the global
reserve currency, a new tactic was tried that did work. Gold
was lent out to gold mines cheaply to sell in the market place
so as to finance new mines and expand gold production. This gold
was then repaid to the bullion banks, from the mine's production
subsequently. The price of gold naturally fell and over a long
period [20 years]. As the gold price fell, so different Central
Banks, including the U.K. sold their gold on public auction,
giving the impression that gold was not a sound basis for money.
On top of that the gold mines,
then and rightly, sold gold forward [hedged], earning from future
deliveries not only the higher current gold price but a good
parcel of interest from the 'contango' [A market situation where
the price for future [forward] delivery is greater than the 'spot'
[immediate, plus one day] price of gold]. This ensured mining
gold was profitable even when the gold price was falling and
in over supply. This was great for the mines and for the U.S.
$, while the gold price was falling and seemingly being discredited.
But in 1999, when it seemed
that all the world's Central Banks were going to sell all their
gold, the Central Banks of Europe said hang on a bit, we're making
our own gold reserves worthless at this rate. Then we saw the
birth of the "Washington Agreement" and a limit placed
on gold sales so as to stop the price from falling. This was
followed by the 2004 Central Bank Gold Agreement, which is now
completing its first year of operation at the moment. This had
the mines tumbling over themselves as they saw the Hedges they
had in place securing a lower price than market price, so began
the de-hedging process. At the moment it seems clear to all that
de-hedging itself has stopped, because they are simply reinforcing
failure, by achieving a loss on this process of de-hedging. Now
the Shareholders accept that deliveries into hedges [allowing
the hedged sale to be completed] are far lower profile than the
actual process of de-hedging, whilst permitting these deliveries
to be called de-hedging still!
But why and what are the Europeans
trying to achieve with further gold sales? Selling for either
the U.S.$ in their reserves, or even the €? The
public reason given is to achieve an income on their reserves.
With capital losses sprinting ahead of income achieved, this
reason is not worthy of a Bank Teller on his first day, let alone
the guardians the nation's savings! A far more likely reason
is to maintain the value of gold round about a chosen level and
controlling this level through public sales in sufficient quantities.
But not to the extent that it causes harm to market confidence
in gold. This is why a survey was done amongst the Bullion Banks
to see what quantity could the market bear without causing the
price to fall. 500 tonnes was decided upon.
This does keep the gold price
controlled, so long as demand does not rise up above this level.
Right now, not only is demand rising above that level, but supplies
of newly mined gold are falling. The Central Bank Gold Agreement
signatories have already sold this year's 500 tonne 'ceiling'
and there is still one month to go until the beginning of the
next year's allotment comes to the market. Clearly they are hoping
that demand does not rise now, or the price will shoot up. We
suspect that they are selling from next year's quota already,
but cannot validate this.
Why sell at all? This question
has not been answered sensibly, by those party to the gold agreement,
but the likely true answer is to keep gold in its place and low
priced, while the € is in the ascendancy on its
way to become the global reserve currency. But gold is now a
global market and no account of China has been factored in. They
are on the receiving end of these paper currencies and are missing
out on gold. If there were any solid reason to selling gold the
Central Banks only have to approach Russia and China and sell
direct off market, but they don't and they won't. The Chinese
don't mind this so long as they can spend the currencies they
receive on developing their economy. With the Chinese now revaluing
their currency in terms of a "basket of Currencies"
[made up from their chief trading partners], the $ and
the € are not the constant focal point of global
reserves, as allowance for other currencies has now been made.
This is a warning to the West, which they would do well, not
to ignore. It is likely that appreciation of the true value of
gold is now growing, for the symptoms of the global economy are
that nations may well pay too high a price for depreciating currencies
by selling appreciating gold!
when Investing - Zimbabwe
More on the disintegrating
Zimbabwe scene occurred since our last report.
The Zimbabwe government has
imposed a 10% withholding Tax on any sales of shares through
their Stock Exchange. Since then all trading has stopped.
It is now a week since trading stopped. The net result has been
the cessation of all Stamp Duty payable to the government, an
important source of funding for them.
It is sad to see respected
Institutions in South Africa still recommending the shares of
Impala, on the basis of its Platinum reserves inside Zimbabwe.
Here is the wording used by them: -
"...Implats remained attractive not only because of its
exposure to platinum mining, but as it has certain assets that
are not fully appreciated by the market. One of these is its
investment in Zimplats. Zimbabwe accounts for 60% of Implats'
reserves and resources but only 5% of group profit...As soon
as the socio-political turmoil in Zimbabwe normalised, the disparity
between Implats' assets and profit contribution would be addressed..."
we would only look at Impala on a basis that valued the Zimbabwe
assets at zero, until the government, not just Mugabe was not
on Zimbabwe's scene. The remark, "as soon as the socio-political
turmoil in Zimbabwe normalised" implies that this prospect
is impending. Who's kidding who? Mugabe retains power because
of his backers, who will live on after he dies, with the present
Vice-President set to take his place, thus giving continuation
to the policies of Zanu-PF, which have to date devastated the
country and left a full third of them headed to starvation and
70% + without employment. Hence the concept of "normalisation"
appears to be a pipe dream and certainly not one worth paying
for. By the time Mugabe and the boys have finished, who can know
whether Implats will still own Zimplats? So far they have targeted
30% over 10 years, but is this the end of the claim?
What will they pay with? All
they have is the Zimbabwe $, or maybe government bonds? Perhaps
then the Zimbabwe banknote shown here, will be worth more than
a share in Zimplats? [U.S.$1]. Do your sums without Zimbabwe
investments for now, for sure!
Aug 26, 2005
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Julian D.W. Phillips
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