Charlotte Mathews
13 August 2008
Johannesburg — SOUTH African heavyweight gold shares plunged to three-year lows yesterday after a $58/oz drop in the gold price in overnight trading to $802/oz, its worst level in seven months.
By late afternoon, both gold and gold shares had recovered some ground, as analysts predicted buying interest would reappear at these levels. Gold was trading at $820/oz by late afternoon, about a fifth below its March peak of $1033/oz.
AngloGold Ashanti, SA's biggest gold producer, dropped as low as R197,59, a level last seen in May 2005, though it closed firmer at R206,49. Harmony's intraday low of R58,26 was at September 2005 levels while Gold Fields' low of R66,50 was last seen in May 2005. In May 2005 the gold price was at about $430/oz.
Since August 2005, some gold miners' costs, including spending on growth, have soared to more than $700/oz. As the gold price drops, miners' profits are squeezed, raising the threat of shaft closures and job losses. SA's gold sector employs about half-a-million people.
Although platinum stocks also slid on a platinum price below $1500/oz, they were not hit as hard as gold stocks. Anglo Platinum, at R919, was back to January levels, and Impala Platinum, at R213,35, was at its lowest since September last year.
Sanlam Investment Management resources analyst Shoaib Vayej said the main factor driving down gold companies' share prices was the gold price, which in turn was reacting to the lower oil price and stronger dollar. Inflation expectations had peaked when oil hit $147 a barrel but since then sentiment had turned negative towards gold.
James Moore of TheBullionDesk said gold had dropped on a combination of factors. It was summer in the northern hemisphere and trading volumes were thin, the dollar appeared to have passed its lowest level, and indices and hedge funds that had taken long positions across the commodities sector -- including oil, metals and grains -- were taking cash profits. But he believed these were short-term events. Investors would head back to commodities as equity markets were still beset by problems after the global credit squeeze.
The reason South African gold companies' shares had fallen faster than the gold price was that they were struggling with other factors, Moore said. They faced labour unrest, safety issues, power shortages and bureaucracy. In China, the government subsidised gold miners whereas in SA they were taxed.
South African miners had to dig deeper, which was affecting costs, while Chinese gold mines were still starting at shallow depths, Moore said.
Vayej said investors would be quite brave to start buying gold and platinum shares at present, though valuations were supportive at these levels. But for local gold companies, the long-term trend was one of declining production, which had not yet been matched by a decrease in fixed costs. Further restructuring would be needed.
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Just yesterday we were told buy the same publication that the price of gold had "rocketed to $860.