Gold tumbles but platinum steadies

Gold, which had risen some 400% between 2000 and 2011 alone, saw its biggest drop in 30 years in mid April but platinum, after a period out in the cold, is rallying. Report by MJ Morgan.

It’s been a tough few weeks for precious metals, with Chinese growth slowing to a more moderate speed and spurring a sell off. Billions of dollars have left commodity funds and exchange traded funds (ETFs) this year as the big picture just doesn’t favour this asset class.

Short of a broad-based global economic recovery, or more enthusiastic quantitative easing, this is likely to persist. That said, likely overselling followed by a rebound means the price graph’s downward trajectory – driven by falling inflation expectations – won’t be anything but a smooth curve.

The platinum market has moved from seven years of surplus into deficit last year, largely due to supply factors with mining, autocatalyst and jewellery recycling all down.

Recovery in the EU and US will translate into greater automotive demand. Additionally, jewellery and medical demand for PGMs is also growing into new usages. These three factors are the key drivers of demand.

Major player Impala Platinum’s Q1 output was 40% up on the previous year and Aquarius Platinum saw production rise 20%. In spite of the recent worries, confident Wesizwe Platinum is pushing ahead with its massive Bakubung project that is scheduled to produce 350,000 oz a year for around 35 years.

Unsurprisingly, labour issues post Marikana are going to be an issue until a satisfactory compact is reached. The National Union of Mineworkers is looking for double-digit wage growth as it seeks to reassert itself in the face of falling membership – and the ground it has lost to its militant, upstart rival, the Association of Mineworkers and Construction (AMCU). The ACMU is now the dominant union in the platinum sector.

Whilst markets have seen huge outflows of speculative capital from gold, expectations that Anglo Platinum will cut around 30,000 oz of production has seen millions of dollars flow into platinum ETFs. South Africa produces 70% of the world’s platinum and revenues from this sector accounted for 21% of the county’s mineral revenues – making improvement in the sector’s functioning of vital importance to the country.

Gold outlook

The biggest reversal in gold prices since the 1980 meltdown saw it fall around 15% from 12^th April but it has since clawed back about half those losses. After the decades long runup in prices, is this the end or a hiatus on its continued upward trajectory? The fall may reflect a shift in concern from inflationary worries to deflationary worries. There has been general frustration with miners who haven’t translated the bull run into profits. This spilled over at Randgold Resources (a big continental miner, especially in Mali), whose shareholders voted heavily against CEO Mark Bristow’s $4m bonus. This is not surprising since they had also seen earnings per share fall 40% on the previous quarter. Another target of investor ire is Barrick Gold who shares fell to a 20-year low and cost it its place as the world’s largest gold miner by market capitalisation to GoldCorp. Gold prices have fallen 12% this year and Barrick is down 44%. Africa’s own AngloGold Ashanti is 37% down. Rising prices in the sector have led to complacency and a failure to focus on returns, it is said. The scale of the sell-off is illustrated by Bloomberg’s figures that suggest that the value of ETF gold holdings fell $40.3bn to $107bn.

A further measure of the bearishness of the market is the fact that European Central Bank’s interest cut from 0.75% to 0.5% did little to energise prices, particularly in the face of better-than-expected US jobs figures. Nevertheless, perennial gold bugs, the Indians and Chinese, have demonstrated remarkably resilient demand for physical silver and gold.

Long-term supply fundamentals mean patient African Business readers would be wise to hold onto their gold. Sooner or later the inflationary effects of mass-scale quantitative easing will be felt.

Central Banks, holders of 19% of the world’s gold, have seen their holdings rise to an eight-year high – not that central bankers are always the best traders.

Zambia, Zim want more from mining

Zambia is seriously looking to tackle transfer pricing. Given that it’s losing $2bn a year to avoidance and transfer pricing (that is 10% of GDP), the country is seeking to crack down. Capital controls, royalty increases and even a continent-wide initiative are all measures on the table.

Similarly, Zimbabwe is looking to raise new revenues from the sector. There was consternation about a proposal to further the country’s indigenisation programme (by which the state will take a 51% in foreign-owned resources firms) by dropping proposed levels of compensation.

Thus far, deals pursuant to the policy have been negotiated on an ad hoc basis. Impala Platinum, for instance, disposed of a 51% stake to local black investors for $971m with the company lending the investors the requisite monies.

Tendai Biti, Minister of Finance, has said that the country may in any event introduce a new tax on miners. The country is practically bankrupt and needs cash for the elections in July, having rejected a UN offer of a $132m loan because of concerns over interference. If talks with South Africa over a $100m loan fail, miners may suffer.

Despite its 800,000 tonnes of copper output generating 20% of export earnings, the treasury receives less than 0.5% of its GDP from the sector. Tax avoidance is blamed for this by many in government and elsewhere. Transfer pricing, inflated consultancy fees and the numerous other contrived tax tricks of the trade are no doubt involved.

Charity ActionAid pointed out in a report that since Associated British Foods purchased a majority stake in Illovo Sugar, anticipated tax revenues fell by $17.7m. Illovo deny any impropriety.

What is called resource nationalism by a grumpy industry is really just the reasonable ambition of countries to keep a fair share of their mineral endowment.

The most potent option to tackle the problem of value leakage would be to introduce a comprehensively detailed pan-continental mining code that would prevent beggar-thyneighbour negotiations to shift mining from one country to another.