18 January 2008

South Africa: Booming China is World's New Egoli

Johannesburg — CHINA overtook SA as the world's biggest gold producer last year, a position SA held for 101 years , according to the Gold Survey 2007 from the precious metals consultancy GFMS.

China's move to the top spot comes after strong, continued growth in recent years, while gold production in SA has continued to decline.

SA's declining production means it is losing out on potential foreign earnings and employment opportunities as the gold price has picked up in the past few years, touching a record of $914/oz this week.

Latest data from Statistics SA for the year to November, released last week, showed SA's gold production fell 12,7% compared with the same period in 2006 because of safety-related mine shaft closures.

GFMS said SA's production for the whole of 2007 dropped 8,1% to 272 tons while China's rose 12% to 276 tons. Production increased in Indonesia, Brazil and Ghana, and was stable in Australia.

In the past few years as China has become friendlier towards foreign investors, investment in gold projects has increased and new discoveries have been made.

Gold production in SA and Peru was worst hit by the increasingly difficult operating environment, GFMS said. Competition for consumables, labour and key plant items hampered project development. Globally, gold production fell 1% but GFMS forecast it would grow about 2% in the first half of this year.

GFMS said the gold price could average $840/oz in the first half of this year and could be even higher in the second half.

"Investor appetite for gold at the moment seems undimmed and this should push gold higher over the year," said GFMS executive chairman Philip Klapwijk.

"Predicting the top is never easy but we always thought the $900 barrier could fall quite soon and then we have to start viewing $1000 as a clear possibility for later this year."

But a short- to medium-term correction in the price back to the low $800s was possible because of the speed of the recent rise and the huge fund overhang on Comex. Investment funds which bought speculatively are holding more gold than they intend to for the long term.

Apart from investment, there was little other demand driving the rising gold price, GFMS said.

High prices and volatility could cause buying by the jewellery sector to slump almost a fifth in the first half of this year. Buying by producers that had sold gold forward at lower prices, and had been buying back gold to eliminate those hedge positions, was also expected to be sharply lower this year.

Central bank sales of gold rose about a third last year to 488 tons. GFMS said despite higher prices, central bank selling was expected to fall slightly this year.

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