The hits just keep coming for gold. As markets finally calmed after Bernanke’s announcement of imminent tapering from the Fed
, gold continues to get slaughtered. With many predicting the metal to eventually lose its grip on the quadruple digit levels, investors are trying to properly time the bottom. The problem is, a number of gold’s movements have seemed to defy all logic with harsh sell-offs coming off of little fundamental news or changes; emotional trading has taken hold.
But there may be a way for buyers to properly time the bottom, as the supply side of the equation is nearing a dangerous level.
All Eyes on South Africa
At one point in time, South Africa
was second to none when it came to gold production. Though the nation’s annual output has since declined, South Africa still accounts for a significant portion of global supply and it is believed that approximately 50% of the world’s gold reserves lie within its borders.
The mining industry has long been a key component of South Africa’s economy, as the resource-rich nation has plenty to offer multinational firms. Gold is no exception to this fact, as a number of the world’s largest mining firms have significant stakes in South African operations. But with gold prices continuing to drop, miners are nearing dangerous levels as costs could soon outweigh the actual spot price of the precious metal.
Here is the cost breakdown per ounce of gold mined for some of the largest producers currently operating in South Africa:
Barrick Gold Corporation (NYSE:ABX): $919/oz.
Sibanye Gold Ltd (NYSE:SBGL): $1,334/oz.
Harmony Gold Mining Co. (NYSE:HMY): $1,220/oz.
AngloGold Ashanti Limited (NYSE:AU): $1,204/oz.
As these costs display, some companies already have their heads underwater, with others nearing critical points. On top of all of this, mining workers and unions have been battling to have wages doubled as South Africa has long dealt with controversy over fair wages
“Anything below $1,400 an ounce is sort of a red line. There’s a vast difference between what labor unions are demanding and what South African mines can afford. It points towards long drawn out negotiations that could end in dispute” says David Davis
, a Johnnesburg analyst at SBG Securities. The threat of a production halt may finally help gold find a comfortable bottom, as this is not the first time South Africa has dominated a precious metal market.
The Platinum Case for Gold
First thing’s first, South Africa is a much more significant player in the platinum world, accounting for about 75% of annual production as well as holding 95% of known global reserves. Still, the recent mining strikes that have hit platinum prices hard could very well be an indicator of what is to come for gold prices.
Though the effect will not be as pronounced on gold prices, South African mining strikes have jolted the price of platinum on many occasions, as a supply glut has forced the white metal higher. Though the nation will not be able to impact gold nearly as much, producers may soon be forced to cut production as costs continue to rise. If that happens, the supply for gold will take a sizable hit, giving prices some relief from their current slide.
Timing the bottom based on these figures is certainly tough, but it is easy to see that at a certain point, South African production will have to take a hit. Should this happen, gold will likely find a comfortable resting point, or even jump in the short term. Keep a close eye on some of these large producers and South Africa in the coming weeks, as they may hold the key for stopping gold’s slide.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.