Australasian Mining Review
Issue link: http://ebook.aprs.com.au/i/26056
35 [Gold review] All things considered, gold has a bright future for at least the next two years, writes Chris Towsey. astonishing event in the career of any broker, analyst or financial adviser under the age of 50, who would never have seen this in their entire working life. We Baby Boomer oldies, as usual, have seen it all before – when I started work one Aussie dollar bought US$1.49 and Australian students spent their gap year in Los Angeles and San Francisco because travel in the US was so cheap. In December 1983, Prime Minister Bob Hawke and Treasurer Paul Keating floated the dollar, hastening its demise to the Pacific peso nadir of 49 US cents in September 2001, coinciding with the September 11 terrorist attack on the Twin Towers in New York and John Howard was swept back into office with an increased majority. Maybe the conspiracy theorists were right! N Our major gold competitor, South Africa, has seen the Rand appreciate strongly over the last three years as well, but African gold companies are doing well, as South Africa manufactures much of their own mining equipment internally and produces oil products synthetically from coal. The appreciating Rand is usually a healthy sign for South Africa. Christopher Hart, the chief economist of Investment Solutions, told the Washington Post, “In the last 10 years, when the rand has strengthened, we’ve experienced higher economic growth and lower inflation,” said Hart, adding that a stronger currency also helps to attract skills. A strengthened currency does hurt exporters, getting less of their own currency for the same product, but many exporters also import so the effects are tempered. Those businesses whose revenue, supplies and costs are based in the local currency are unaffected by exchange rates, although stock exchange listed companies are affected by market sentiment. So how has this career highlight for the average 20-something analyst impacted on the Australian gold price, market sentiment, gold explorers and producers, and what are the implications for the future price? The flood of annual reports from the gold sector companies show that while fundraising was difficult for some, most had a reasonably good year as speculative investor interest was ovember 2010 saw the Australian dollar overtake the US dollar for the first time in 28 years since June 1982, adding a new meaning to passing the buck. This was an kept alive by the steadily rising gold price in US dollar terms. Dogged resistance by Australia’s Reserve Bank and currency traders pushed our exchange rate the opposite way, keeping the Australian dollar gold price suppressed but still at enjoyable levels for Australian producers. For gold producers, depending on their ratio of employees to contractors and whether they are open pit or underground, their main operating costs are wages (around 40 per cent to 50 per cent), contractor labour (10 per cent), electricity (eight per cent) and consumables such as explosives, diesel, blast-hole drilling consumables and repairs and maintenance parts. Diesel, strongly affected by the exchange rate, usually is less than four per cent of cash costs. Electricity may be from the state grid or privately generated, but if from the state grid, it is independent of exchange rates. Heavy equipment is usually imported, but lasts three to five years, and is a capital item amortised over the equipment life, and so impacts little on cash costs. Wages for employees and contractors are in Australian dollars so most local producers’ cash costs are relatively unaffected by the exchange rate. Commodity prices are controlled by supply and demand, and gold behaves partly as a commodity, partly as currency and partly as a store of wealth and a hedge against inflation. Demand for gold is driven largely by the jewellery sector and influenced by cultural factors such as the Indian wedding season in the auspicious time of the year around Diwali, the Hindu festival of lights. This is a lunar festival based on the full moon and falls between mid-October and mid- November. In 2010 it was 5th November. Gold is a traditional store of wealth in India, and the country currently has one of the highest saving rates in the world, estimated at around 30 per cent of total income, of which 10 per cent is already invested in gold. According to a recent World Gold Council report on gold in India, in 2009, total Indian gold demand reached US$19 billion, accounting for 15 per cent of the global gold market. Over the past 10 years, the value of gold demand in India has increased at an average rate of 13 per cent per year, outpacing the country’s real GDP, inflation and population growth by six per cent, eight per cent and 12 per cent respectively. Based on the World Gold Council estimates, India owns over 18,000 tonnes of above ground gold stocks Australasian Mining Review 2011: issue 2.1 Gold passing the buck