Since the start of the present century, gold prices have grown almost six-fold to record levels whether measured in US dollars or in other major currencies. While we are confident that current levels are easily sustainable, our long-term business planning is informed by conservatism and on prices of as little as two-thirds of those currently prevailing.
The fact is that the gold market has been guided by a number of fundamental factors and structural developments.
During the decades of the 1980s and 1990s many of the world’s central banks were net sellers of gold – raising currency to fund government spending at prices as low as a fifth of those currently determined by the market. This sales overhang was a major contributor to the metal’s fall from its then high of $850 in 1980.
However, particularly since the global financial crisis triggered in 2008, central banks of economically-developed nations have largely withdrawn from the market. Meanwhile, those of some developing nations, particularly China and Russia, are diversifying reserves away from the dollar. Concerned also about the future of the euro, these countries have become avid net buyers. The only official seller of gold now is the IMF, and its sales are likely to be restricted.
This shift in central banks’ gold strategies has to a considerable extent helped absorb the growing new mine production from producing countries such as China, Australia and the USA.
Global financial turmoil has led to a massive increase in demand for gold from individuals and institutions seeking safe-haven investments. And their ability to acquire bullion (rather than paper gold) has been enhanced by the emergence of gold-based exchange traded funds (ETFs). This represents a fundamental shift on the demand side of the gold market – a shift that will persist with private bullion holdings set to grow across the globe – providing strong support for gold’s price.
Jewellery demand is somewhat more volatile with buyers in developed economies curbing consumption when faced with higher prices. However the market is shifting towards China and India, the latter having long been a driving force in the jewellery sector.
On the supply side, traditional sources such as recycled metal have tended to curb deliveries as sellers have been holding on to their stocks in anticipation of rising prices.
More importantly, however, new mine production has been benefiting from the massive investments in exploration and new mines coming on stream this past decade. Overall, production from South Africa’s mature mines has been falling and the country has been overtaken by China, America and Australia in the production stakes.
Nimble and cost-conscious newcomers are entering South Africa’s mining sector, developing resources long considered unattractive and ignored by the major producers. It is these junior and mid-tier miners that are taking advantage of gold’s new era.
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