Gold and South Africa

Freemarket Gold and Money Report (07/27/2009)
"In South Africa, it is likely that the strong rand, which has risen 17.9% against the U.S. dollar and 14.7% against the euro so far this year, will have a negative impact on the earnings of mining companies. While gold has risen 7.8% this year in terms of dollars, it is down -10.1% in terms of the rand.

Nearly all input costs of SA mining companies are rand denominated, with very little material imported. Consequently, the mining companies do not benefit from the strong rand, and can indeed expect margins to be squeezed until the gold price begins rising again.

The gold price in terms of rand has been in a general uptrend for decades. Then a few years ago, the uptrend began to accelerate. After peaking at ZAR 320k per kilo earlier this year on gold's last foray to $1,000 per ounce, the rand price of gold has fallen. It is now about ZAR 228k per kilo, but importantly, it now rests on the bottom line of the uptrend channel. Will this new uptrend channel hold?

Yes, I expect it will. While the rand could strengthen further against the U.S. dollar, the gold price is ready to soar in dollar terms. In short, gold may not rise as rapidly against the rand as against the U.S. dollar, but it will rise nonetheless and bolster the operating margins of the South African mining companies.

South Africa's mines are indeed old, and grades have generally been in decline. And after being the world's largest gold miner for nearly all of the 20th century, South African production has recently fallen to third place after China and the USA. This downtrend in production can be expected to continue."

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