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Gold Rallies Following Sharp Drop in South African Gold Production

Commodities / Gold & Silver Dec 09, 2008 - 07:55 AM GMT

By: Mark_OByrne

Commodities After falling sharply last week, gold rallied yesterday on the back of a weaker dollar, higher oil (Light Sweet Crude Oil Future - Combined - JAN09 is up more than 6% yesterday after falling an incredible 25% last week) and commodity prices and the Obama fiscal stimulus package.


The economic recession will get significantly worse before it starts to improve, US President-elect Barack Obama said in an interview at the weekend. “We’ve got to provide a blood infusion right now, make sure that the patient is stabilized,” he said, adding that the budget deficit, by some estimates more than $1 trillion, would have to be put on the back burner “for now.”

Near record high trade, current account and now soaring budget deficits and now the likelihood of a 0% interest policy (ZIRP) is bullish for gold.

Gold remains very oversold and continues to consolidate and build a firm base. Technically speaking, gold suffered serious damage in recent weeks. But the recent action looks increasingly like a healthy consolidation and there appears to be a rounding saucer or saucer bottom developing. These are strong basing formations that normally take some 3 to 6 months to complete prior to strong rallies.

The physical marketplace remains tight - premiums on coins and bars have come back somewhat but remain elevated and there are still delays and shortages of most popular bullion coins (particularly silver).

Supply remains under pressure with western central bank gold sales falling (and Russian, Chinese and other central bank creditor nations buying gold) and production internationally remaining lackluster at best as evidenced in the production in South Africa which continues to fall.

South African Gold Production Continues to Fall Significantly - From over 1000 tonnes in 1970 to 272 tonnes in 2007
South African gold output fell 14.4 percent in volume terms in October compared with the same month in the previous year. Gold production fell 17.8% against the same three months last year.

It is estimated that South Africa's full year output could be as much as 1 million ounces lower this year than last.

South African gold output has been falling since 1970 when annual production was over 1,000 tonnes. Last year South Africa produced 272 tonnes of gold. South African gold output fell to its lowest level in 84 years in 2006 because of declining mining grades. Production in 2006 was 275,119kg in 2006, some 7.5% lower than the previous year. The last time South Africa produced less than 260 tonnes of gold was in 1920.

Power issues with the state-owned power utility Eskom which suffered a near collapse in the electricity grid in January have also contributed to the recent decline in production. Eskom has since limited supply to around 90 to 95 percent power to mines in the country, the world's biggest source of platinum and the second-ranked gold producer.

While China is now the world’s leading gold producer and has increased its production to over 270 tonnes per annum in recent years. It is important to note that this increase in production has been met with a corresponding sharp increase in Chinese demand meaning that Chinese gold does not add to supply in the international marketplace as it is all consumed in China which is a net importer and increasingly so.

Total annual gold market consumption is estimated at about 4000 tonnes, while annual mine production is only about 2500 tonnes. The gold deficit has been made up by central bank sales in recent years but central bankers are increasingly reluctant to sell their gold.

Of the world’s three biggest gold producers (China, South Africa and Australia), only China has managed to increase gold production in recent years. This means that the supply/demand balance in gold is becoming increasingly tight and likely to lead to markedly higher prices in the coming years.

By Mark O'Byrne, Executive Director

Gold Investments
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Gold and Silver Investments Limited
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EC3V 3ND
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Email info@www.goldassets.co.uk
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Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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