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South Africa’s huge gold and precious metals industry needs more power, fast…!

SOUTH AFRICA is no longer the world’s No.1 Gold Mining nation, but it remains one of the world’s primary precious metals producers, report Lisa Barr and Lara Crigger at Hard Assets Investor.

It also continues to struggle to meet its own growing electricity needs – and there’s little relief in sight, says Eskom, the state-owned power utility. It accounts for 95% of South Africa’s electricity supply, which is crucial to Gold Mining and precious metals production. Unless more power plants are built soon, however, the nation could face severe power supply shortages in 2011-13 and beyond.

This would cripple South Africa’s precious-metals mining industry, which, according to Johnson Matthey, accounts for some 78% of the world’s platinum, 35% of its palladium and 87% of its rhodium supply. And Eskom’s announcement could impact the precious metals market well before 2011, says Jessica Cross, CEO of VM Group.

Working in conjunction with Fortis Bank Nederland, VM Group – which produces the annual Yellow Book of Gold Price and mining research – provides research and analysis of the metals and broader commodities markets, including precious and base metals, energy, agribusiness and renewables.

Here, Jessica Cross tells Hard Assets Investor about South Africa’s power troubles, including what ripple effects the news could have on automakers, how platinum-group ETFs have affected the market, and what difference a flooded mine shaft makes.

HAI: What consequences would ongoing power disruptions in South Africa have on the precious metals markets?

Jessica Cross: It could be very serious, particularly for the PGMs [platinum group metals], not so much for gold. Well, South Africa is not the biggest gold producer anymore, but it is still up there, so any loss of production will certainly impact that market, too. But the real question is, what happens to PGMs? The world needs PGMs for autocatalysts, and primarily, South Africa is the main producer.

So obviously, any break in power supply to the mines is of very serious consequence, particularly for your deep hard-rock mining. If you have a prolonged power cut, chances are that those mines could flood, and the cost of trying to de-flood them is enormous. So it’s not just a question of the power going out and coming back on tomorrow, and it all gets sorted out; this has long-term consequences for PGM and gold capacity. It’s very serious.

HAI: When a mine floods, how long does it take to de-flood it?

Jessica Cross: Well, very often, they don’t even do it, because it just proves to be so expensive. It depends on the age of the mine, the depth of the shaft and how much life is left is in that shaft. In the end, you really, really don’t want to flood a shaft. It could take months to get that right, and everything – basically, your equipment, the shaft – all gets decommissioned.

So any announcement from Eskom along these lines makes one sit up and think what’s going to happen to PGM prices.

HAI: Something like that would certainly lend long-term support to PGM prices.

Jessica Cross: Absolutely. And I’m sure PGM producers are in intense discussion not only with their management, but also the government. Obviously, mining is crucial to the South African economy; it’s all intertwined and interrelated. It has implications in South Africa for employment. But a regular and reliable source of power is core to that industry and the economy, and really they can’t afford to have a problem like this re-emerging.

HAI: It’s interesting, because the platinum and palladium markets are so much smaller than other precious metals markets. So an announcement like this has the potential to dramatically drive prices.

Jessica Cross: It certainly does. I think once investors pick up on this it will create a knee-jerk reaction, because of South Africa’s dominance as a producer of PGMs, but also as you said, the markets are that much smaller, and people know that the PGMs are very instrumental in the control of exhaust emissions.

HAI: Speaking of which, how do you see power disruptions affecting the auto industry, especially with the current recovery in automobile demand?

Jessica Cross: Well, it’s interesting that they’re happening at the same time. You could have a double whammy. You’ve got very strong car registrations in China, and a recovery in Europe, a recovery in the U.S. It’s all primarily gasoline-driven cars, too, so you’re not seeing many electric cars coming in that don’t use platinum or PGMs at all. The market penetration isn’t there, and we don’t see that happening for the foreseeable future.

So we’re still very much relying both on diesel and gasoline catalysts, both of which require PGMs in different ratios. The procurers of these metals for the car manufacturers are left in a difficult situation, because they’re obliged to procure metals for long-term plans and production lines, but they have to do that not only amid rising prices, but also volatile prices. That’s very difficult.

HAI: There’s another factor, too, here, and that’s the platinum and palladium ETFs. Europe has had physically backed PGM ETFs for awhile, but in the United States, PPLT and PALL just launched, and they’re very popular. How do you see ETF investment affecting demand in this sector moving forward?

Jessica Cross: All the precious metals ETFs are doing particularly well. They’re the right products at the right time in the right place. They’re allowing investors to participate in this commodities cycle in a way that they couldn’t do before.

Clearly, if you have a sharply rising PGM price because of the Eskom factor in South Africa, you’re going to see more interest in these ETFs. People who got in early are obviously going to do very well with their investments. So I think the Eskom factor could raise the volatility of the ETFs, raise the turnover and it will lead to more investors coming in as a consequence.

HAI: Do you see the ETFs having a disproportionately large effect on the platinum and palladium markets, compared to something like GLD and gold?

Jessica Cross: I think you’re getting a slightly different sort of investment coming in, but it’s a very savvy investment. I think, yes, the ETFs are a very significant bottom line in your demand/supply balance, and this will instill volatility. So not only could there be upward pressure on PGM prices, but you’ll see a roller coaster of very sharp up and down movements, as this thing continues to play out.

That in itself gives investors a fantastic opportunity to trade. There’s nothing more boring for an investor than a very stable price that moves a tiny percent over a certain period of time – it’s like watching paint dry. Of course, you could lose your shirt very quickly, too! So I’d say PGM ETFs are not for the faint of heart, and they’re not for the inexperienced. But there are enormous opportunities coming in this industry.

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Source:Mining-Energy Trouble in South Africa

Gold Investment demand now dominates the precious-metals market…

WE KEEP hearing from some sources that the Gold Price will tackle previous highs vs. the Dollar, only to fall to $850 an ounce, writes Julian Phillips of the Gold Forecaster.

We heard this before gold rose to $1100, with many analysts believing that there would then be a correction to $850. But it didn’t happen then either. What happened was that gold held its ground, and then broke upwards through resistance to set itself on track for higher prices.

If previous highs are hit – and if a "double top" is formed – then a major correction could come about. But there are two ‘ifs’ there, which is not solid ground on which to stand.

It is at these times when we bring in the fundamentals. Many will say that the technical picture can stand alone. But in this situation where one can only hope to read a technical picture still to come, that would be dangerous.

Fundamentally, in the last few years, the gold market has changed considerably, switching from essentially a market where there was little investment interest to one where Gold Investment demand now dominates. That investment interest has now reached sovereign wealth fund and central bank level, areas well beyond past market shapes. So the technical patterns now being set are based on a far bigger, differently natured market, too. The technical picture is still very valid, but must be tempered by the new fundamentals. So let’s not ignore these changes when assessing future price moves.

One only has to watch the media to see that it is so easy to fall victim to persuasive, if unbalanced presentation. TV journalists in particular have to present a story, one with drama and presence, simply to keep the audience watching. This can easily detract from realities.

For example, hedge-fund manager George Soros was accurately quoted as saying that gold was the "ultimate bubble". But the press interpreted that as him discrediting gold. However, to the contrary he was pointing forward to the future of gold, when it would become the "ultimate" – as in final – bubble.

How do we know? Simply because he has been buying the shares of Gold Exchange Traded Funds and shares in Nova Gold, a gold exploration company. It is more likely that he is Buying Gold with a tremendous Gold Price rise in view. This is now obvious, but to date we have not seen a change in the views on his position. He’s read them, better than they read him.

Likewise, we take the technical picture and the fundamental picture together before we come to a conclusion. Here’s the scene now…

Gold Investment demand is rising and from old money as well as new. It is buying anonymously and through the Fix in London so as to stay below the radar. Why? The problems of the Euro are not going to go away. They are structural. With national interests clashing with Eurozone interests among all members over money, only words of support are coming forward, no action. Confidence in the Euro is waning, no matter what politicians are saying.

US Dollar problems have not changed and there is little political will to attend to the ailments of the Dollar, riveted as they are on internal matters. The Dollar and the Euro will display a semblance of stability in the days ahead as it is realized they are both gliding down together in terms of confidence.

China is growing rapidly and has become self-sufficient in terms of internal growth. Exports remain important to them, hence the US Dollar ‘peg’ system they currently operate. Therefore, what they can’t afford to do is to let the Yuan rise strongly against all currencies. Yes, we do see an eventual lifting of the ‘peg’ – but only when the Yuan will not rise strongly against the US Dollar. This can only happen if Yuan are gushing out of China to such an extent that the currency will either fall or hold around current levels.

In such an environment of uncertainty and doubt, it is unlikely that there will be a great exit from gold. It is far more likely that Gold Investment will remain attractive as long as the world is in the present state.

Now look to the Indian sub-continent, where private households are well known for their caution when it comes to Buying Gold. They are very careful not to buy if there is a likelihood of the price falling heavily near-term. Thus they have been out of the market during the bulk of the consolidation we have just weathered. Last year imported gold was extremely low, and the market was supplied to a large extent by scrap gold. Now Indians are turning buyers again. History tells us that they believe we have seen the low around $1050 to $1100 and that price now forms good support.

In addition, Chinese households are inherent savers and have only recently been in a position – and a government-encouraged position, to boot – to Buy Gold. Both nations governments are steady buyers of gold as well. Certainly we would expect the central banks of India and China to treat any fall in the Gold Price as an investment buying opportunity.

So the conditions which would support a major correction in the Gold Price are not present. Should a correction from a failed attack on recent highs occur in such an environment it is likely to be a short one.

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Source:Gold Investment: New Market Shape

London luxury goods department store Harrods is moving into the precious metals market with the launch of a service to sell investment-grade gold bullion bars and coins to customers.

Source:Harrods moves into flourishing gold market (Reuters via Yahoo! News)