RAPAPORT... Pierre Lassonde, vice chairman of the Denver, Colorado-based Newmont Mining Corporation, made headlines in August when he told a Diggers and Dealers conference that he expects the price of gold to soar above $1,000 an ounce. If the prediction comes true, it will mark a dramatic change in the status of a commodity that took a beating in the markets of the late 1990s. What factors are making gold ever more precious?
Demand for gold is rising sharply in many parts of the world, particularly in Asia.
“Gold demand is at an all-time record in dollar terms, with a $14.5 billion jewelry demand in the second quarter of 2007,” says Jill Leyland, economic adviser to the London-based World Gold Council (WGC). This figure represents a 37 percent increase over the same period a year ago, and the first half of 2007 saw twice the demand as the first half of 2006. Part of this demand, notes Leyland, is investment demand, for investors are eager to make use of the traditional hedging quality of gold against an uncertain or weak dollar prone to the effects of inflation.
Investors are keenly aware that acute inflation has characterized much of 2007. The rate has consistently climbed from one month to the next, except for June to July, when it dipped from 2.69 percent to 2.36 percent. In the current situation, aggravated by the global political storms over Iraq and terrorism, investors are eager to find a secure hedge against the declining dollar. When you compare this period against the pre-9/11 calm of the late 1990s, the dynamic is all the more evident. “Inflation was low and falling. The dollar was strong and strengthening during much of that period – this provided a downward influence on the gold price,” notes Leyland.
NEW BUYERSBut an even stronger factor making demand surge is the rapacious market for gold in India, China and other countries in Asia. In India, for example, entrepreneurs and other members of the growing, technocratic middle class are buying as much gold as they can get their hands on. After the Akshaya Tritiya festival in April, during which India’s Hindus make a show of purchasing vast amounts of gold jewelry and wares, comes the Rakhi festival in August, an event celebrated by both Hindus and Sikhs. The gold market also benefits from a huge volume of engagement and wedding festivals in the summer, stable prices and a general economic upswing. The upshot is that demand for gold in India in the second quarter of 2007 reached 317 tons, an amount equal to half the output of all the world’s gold mines during the quarter, according to the WGC.
Yet India may not be the country exerting the greatest impact on the gold market. As Paul Mitchell, president of the International Council on Mining and Metals, told the World Mining Investment Congress in May, “You all know the key factor has been high commodity prices, driven by fast-growing demand, particularly from industrializing countries like China.”
Many of China’s consumers are eager to buy “lucky balls,” orbs of 24-karat gold that the Chinese place together on a red string, producing a bracelet or necklace. The ostentatious display of “lucky balls” reflects the allure of a once-forbidden product, since private ownership of gold was prohibited by law in China until 2002.
WET BLANKETS
With demand for gold surging throughout the world, supply of the commodity faces such constraints that it is a wonder that prices do not go higher still. Mining gold is not something that a company just one day decides to do. Mining happens only after years of exploration, environmental impact studies and bureaucratic hassles involving permits and licenses.
Doing a survey of an area where gold may exist, submitting an environmental impact statement and getting approval can itself take up to four years, says Omar Jabara, director of communications for Newmont. This process, combined with building and getting air and water permits for new facilities, means that it can take ten years from locating deposits to launching a fully functional mine. Newmont has 93 million ounces of gold in reserve, some of which may not be on the market for quite a few years.
A similar situation prevails for other mining corporations, which are feeling a “supply pinch.” In some cases, market forces may have demanded the cessation or closing of a mine whose gold was not all gone. Take Newmont’s Boddington Gold Mine in Western Australia, which was turning out gold rapidly before its closure in November 2001. Although there were still deposits left in the “basement rock” under the mine’s two huge pits, extracting that substratum would have been a far more specialized process, involving an investment of time, work and mining technology that gold prices in 2001 did not justify. Now that the prices are surging again, Newmont has decided to draft new mining and mine reclamation plans, win government approval and commence prestripping activities, in the hope of full production by late 2008 or early 2009.
In a similar case, the Toronto-based Barrick Gold Corporation is reopening one of its mines in Nevada. “Ruby Hill ceased operations as a weak metals market hurt profitability,” Barrick spokespersons noted in a statement. But in the new environment, the Ruby Hill Mine can be central to Barrick’s strategy for upping its gold output to 8.4 million ounces per year.
The Vista Gold Corporation, an exploration and mining company based in Littleton, Colorado, had completed assessments and feasibility studies for sites in Nevada with loads of gold. But it took a consistent strong showing for the commodity – trading over $600 per ounce for nearly a year – before the company decided to develop these latent mines. Even so, it will take about five years before Mount Todd, Yellow Pine and other mines are up and running, says Connie Martinez, manager of investor relations. All this is based on the expectation of a future minimum price of $650 per ounce. In fact, five years would be an achievement in light of all the forces with which mining companies must grapple.
Gold vs. Platinum Price Movements 2002 to 2007Similar factors to those constraining the supply of gold are exercising a deleterious effect on the supply of platinum. Johnson Matthey, a leading authority on platinum metals, wrote in a July 2007 column of Platinum Metals Report of “supply disruptions” and labor disputes between South African miners and the companies extracting platinum. The latter conflicts have forced prices higher in anticipation of what could become an even tighter market. “During July,” the company said, “platinum continued its bumpy ride and recorded its highest-ever average monthly price.” Gold and platinum are experiencing unprecedented demand. The chart at right reflects the upswing in prices of both precious metals over the past five years.
Article from the Rapaport Magazine - September 2007. To subscribe click here.