Gold Loses its Lustre – in More Ways than One

Gold has been back in the news again – but for the wrong reasons this time.

Up to very recently, it has been an incredible ride for gold. In fact, gold has been a shining beacon the past couple of years, setting new all-time records in both price and output:

• In September 2011, we saw bullion reach an all-time high of $1920.94 per ounce.
• And 2012 saw the market consolidate above $1525 per ounce, and record the highest yearend price together with the largest global gold production ever (2700 tons).

But in recent months, gold has started to lose its shine, with April 2013 going down in the record books for having the largest 2-day drop of gold’s price since 1980. The sharp sell-off saw it lose a full 14.7% of its value, and brought bullion down 20% off its September 2011 peak.

The natural reaction to this, of course, is that such a dramatic price movement must surely impact the South African economy and the Rand…

OR IS IT?

If this is what you truly believe, you are living in the past, and the inserted chart will be a big eye-opener.

It reflects the gold price against South African gold export volumes in Troy ounces and as a percentage of total exports, and below that 3 pie-charts showing South Africa’s share of global gold production in 1970, 1990 and 2012.

These charts show a very telling story:

• From the mid-1940s, South Africa gold exports expanded consistently for a quarter century, peaking in 1970 at 32.6 million ounces (1047 tons).
  • Over this time, after initial dropping from 46% down to 30% of total exports by 1950, gold represented around 30-35% of total exports – a significant proportion.
  • And in terms of global presence, South Africa was by far the largest gold producer, with 67.7% of total global production in 1970.
• But from 1971 (when the US abandoned the Gold standard), South African gold output declined by a third even as Gold rose dramatically to hit $850 in early 1980. Despite the reduction in output, gold exports increased in value to 46% of total exports, thanks to the higher gold price.
• While annual gold output remained pretty steady for the balance of the 80s decade, the reduction in gold price and increased exports started seeing gold’s share of total exports fall down to 24% by 1990.
• By this stage, while still the world’s largest producer of gold, South Africa’s share of global production had dropped to 26.4% of the 2289 tons produced (a 55% increase in production from 1970).
• But since then, apart from a short recovery in the early 1990s, things have deteriorated alarmingly. Despite the gold price having more than quintupled since 2000, SA production has dropped to below 10 million Troy ounces the past 8 years (less than a third of 1970 levels), and contributed a paltry 6% to total exports in 2008.

And then, the real shocker – 2012…

• Despite the yearly average Gold price being at its best levels ever, and record global gold production of 2700 tons, South Africa managed to export its smallest volume in living memory – just 5.2 million ounces (36% of 2000 output, and just 16% of the record 1047 metric tons in 1970).
• Combined with this, South Africa’s share of global gold output fell to a lowly 6.3%, pushing it into fifth place behind China, Australia, USA and Russia.

So, what effect does Gold have on our total economy and on the Rand?

As can be seen, historically it did have a significant impact, being the backbone of our economy and making up a large chunk of our export volumes.

But times have changed dramatically the past 40 years and gold’s favourable shine on the economy has dimmed.

The truth is that, apart from a sentimental association – a fond lingering remembrance of being top of the pile in the global gold stakes – gold has VERY little impact on the current economy and the Rand!

And yes, the Rand did weaken, yes, but this is not because of gold.

In fact, our forecasts we predicting weakness in the Rand back in February, based on the patterns of mass human emotion that had been showing up in the price movements of the market up to that point.

Of course, since then, we have seen some Rand strength back below 9.00.

Where to now?

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To your success~

James Paynter