Gold fever cooling down

Whilst gold’s decade-long bull run appears to have come to an end, African production proceeds surely and steadily. MJ Morgan presents his monthly mining news round-up.

Investors have withdrawn their money from gold, as the global economic recovery continues and fears of further crisis recede. Strong demand from Asia has, however, allowed prices to stabilise.

Recent events in Ukraine have also driven safe-haven buying.

Nevertheless, the annual Thomson Reuters GFMS gold survey sees prices for 2014 averaging $1,225/oz.

Prices averaged $1,400/oz in 2013 and are currently around $1,300/oz. A recent Bloomberg poll estimated gold would end the year at $1,550/oz.

Africa is the source of 20% of the world’s gold, with much of the growth in output on the continent coming from West Africa.

African Barrick Gold expects output to be between 650,000 oz to 690,000 oz this year. First quarter output rose to 168,400 oz, with profits up 8% at $22.4m but significant output growth in expected from the Bulyanhulu mine in Tanzania.

Its all-in sustaining costs (a broad metric measuring production costs) are $1,131/oz.

The company is a spin-off of the world’s biggest gold miner Barrick Gold’s African assets, and was launched in 2010. The giant still owns 64% of the company, having sold 10% of its subsidiary in March for $188m.

Barrick’s first quarter profits fell 90% year on year to $88m. All-in sustaining costs at its biggest mines are expected to average $850-900/oz this year.

China, which has loaned $1.5bn to Zimbabwe in the last three years, is understood to be requiring any further loans to the country to be backed by gold.

Zimbabwe’s GDP in 2013 was $4.1bn. The country’s historical economic mismanagement is unlikely to inspire lenders with confidence and China is thought to want to convert its vast dollar holdings into gold. Mineral exports are worth around $2bn a year, total debt is said to amount to $10bn.

Zimbabwe has been seeking tenders to recover an estimated 3.75 tonnes of gold (worth about $140m) from calcine dumps at the former Kwekwe Roasting Plant.

China overtook India last year as the world’s biggest gold market (as it also is for seaborne iron ore, copper, zinc and aluminium) and demand there has been critical in holding prices up.

Furthermore, the World Gold Council (WGC) recently reported that it estimated 1,000 tonnes of gold (about 20% of last year’s production, worth nearly $40bn) was being used as collateral in Chinese commodity-backed loans. Gold prices fell on the news, as there is a perception that this practice is going to be cracked down upon by the authorities.

There are significant gold flows into Hong Kong/China. If these are not being used for consumption but for loan collateral there is a risk of unwinding, whereby lots of gold gets dumped on the market and prices fall.