While most major gold industry stakeholders agree that the yellow metal will continue its upward trajectory in 2013, local invest- ment management firm Stanlib remains cautious.

The firm’s gold and precious metals fund manager, Kobus Nell, expects the gold price to move sideways this year, staying at a nominal price of between $1 650/oz and $1 750/oz, but declining in real terms because of a better-than expected global growth outlook.

The resource analyst explains that, while the gold price has been increasing since 2008, so has inflation, which results in sideways movement.

Meanwhile, Thomson Reuters GFMS’s ‘Gold Survey 2012’ report predicts an average spot gold price of $1 775/oz for the first half of this year, 6.4% higher than last year’s average of $1 668/oz, based on the Reuters nominal spot closing price.

However, the report also expresses concern about growth in the world’s major economies and its effect on central banks’ monetary policies, as well as investor concern over sovereign debt levels, which are key drivers of gold investment.

For the same reasons, Nell bases his cautious outlook for gold on the volatility of the US market and the US’s open-ended quantitative programme.

“I don’t know how long it will take for the US to get out of this recessionary type of behaviour, but it poses a significant risk for the gold price,” he says.

Should the worldwide growth outlook improve, it could raise expectations for yields to rise. However, if the US government continues to increase money supply to sustain economic recovery, yields will likely remain low.

Although the fear of currency dilu- tion, owing to quantitative easing, signals lower yields, which will favour the gold price, the US’s alluding to better growth numbers and stabilisation will have the opposite effect, explains Nell.

“In 2012, it [appeared that] the gold price would shoot to $2 000/oz, but later in the year we started to see some positive data coming out of the US, showing some light at the end of the tunnel,” he says.

Nell maintains that the fear of dilution and low funding rates contributed to the gold price bull run leading up to the fourth quarter of 2011. Since then, the value of the US dollar has been fluctuating, causing gold price volatility and market uncertainty.

He adds that expected US growth puts the global gold market at risk of being devalued.

“Anticipation that the yield will push up and that the funding costs of holding gold will get more expensive does not bode well for the gold price,” he says.

Revising Strong Growth Aspirations

While many of the world’s major gold companies are geared for a stronger gold price, having implemented strong growth plans in recent years, Nell believes there is widespread restructuring taking place and that these companies are in the process of doing away with growth aspirations to focus on quality production, better margins and better yields for the investor.

He explains that investing in a high-growth profile is risky because it depends on a higher gold price. However, if a mine’s structural margin is in decline and the gold price is not rising above underlying production costs, it puts pressure on the profit margin.

This, maintains Nell, is the biggest challenge facing South Africa’s gold- mining industry, which, he says, is in structural decline.

“Some local gold miners have been too ambitious and fixated on growth strategies,” he says, adding that, as a result, the quality component in South Africa has suffered.

Nell points out that many local gold mines are mining deeper and further away from infrastructure, which is costly in terms of logistics and transportation. The increased depth also adds to ventilation and cooling costs.

“Structural decline, compounded with increased production costs and labour instability – the Achilles heel of many mines that are struggling with lower gold prices – impacts on potential future production and growth,” he avers.

Nell believes diminishing return on investment could be a major challenge for some South African companies, owing to increased risk when investing in gold mining companies, instead of physical gold bullion.

“The investment platform overall is not promising because one needs an ever-increasing gold price to support production – even flat production,” he says.

Nell further explains that a sideways or downward movement of the gold price places pressure on production, which, in turn, places pressure on gold companies to make key decisions about the future.