Despite high gold prices, production of the yellow metal in South Africa has failed to respond meaningfully to worldwide demand, rising only 0.2% in 2012, according to Thomson Reuters GFMS’s Gold Survey 2012 – Update 2.

Towards the end of last year, the gold price had increased on a yearly basis for ten years and most international financial institutions believe the trend will continue throughout 2013, states the survey.

But the local gold mining sector’s bene- fiting from the projected price increases could be limited by what has been described as “a growth constraint” by mining veteran Neal Froneman, CEO of Sibanye Gold, into which Gold Fields’ South African assets, except the South Deep mine, were spun late last year.

“There is a lack of focus on improving mining structures. Mines are only focusing on productivity and efficiencies. Reallocating capital to the correct areas could ensure continued profitability of the industry,” he tells Mining Weekly.

Further, the local gold sector’s appeal for foreign investors has dimmed somewhat as a result of all-too-frequent industrial action, with Chamber of Mines (CoM) CE Bheki Sibiya remarking in December that the Marikana tragedy – where 34 striking mineworkers died in August in a stand-off with police – had shaken South Africa’s reputation as a world-class mining investment destination.

But, as the world emerges from recession, South African minerals, including gold, will feed into the big structural shifts in the global economy, he avers.

The country continues to have the world’s largest reserves of gold after more than 126 years of mining and Sibiya is optimistic that the emerging mood within the ruling African National Congress (ANC) and infrastructure spending priorities would release South Africa’s mineral wealth.

For some time, some in the ANC, including Julius Malema, the now expelled leader of the party’s Youth League, agitated for the nationalisation of the country’s mines, a stance many commentators said deterred potential investors. This policy option was rejected at the party’s elective conference in December.

The CoM says the mining sector’s 2011 multipliers accounted for 18% of South Africa’s gross domestic product (GDP) and for 29%, or R1.4-trillion worth, of the shares traded on the JSE.

The mines spent R46.5-billion of capital during the same year, paid R25.8-billion in tax and R16.2-billion in dividends. Some R484-billion was spent from income of R489-billion, the overwhelming bulk in South Africa itself.

Gold Price

The GFMS report indicates that world gold investment is forecast to rise by just over 20% in volume terms and by almost 30% in value to $48-billion for the first half of this year.

According to the report, many factors that have underpinned gold’s bull run to date are likely to remain in place for the coming year.

The survey of 37 analysts predicts an average spot gold price of $1 775/oz, 6.4% higher than last year’s average of $1 668/oz, based on the Reuters nominal spot closing price.

The report also highlights concerns over economic growth in the major economies, its impact on central banks’ monetary policies and investor worry over sovereign debt levels, which are the key drivers of this inflow of investments into gold.

It adds that confidence in gold was further driven by ongoing central bank buying of gold last year, with the sector’s net purchases estimated to have risen by 17%.

Thomson Reuters GFMS metals analytics global head Philip Klapwijk avers that demand in this segment of the market was again driven by several central banks’ actions to moderate exposure to the major currencies and that he expects the large net purchases by the official sector will continue in 2013.

Analysts’ Predictions

The London Bullion Market Association’s (LBMA’s) yearly survey suggests an average gold price of $1 753/oz for this year, while UK-based HSBC bank chief precious metals analyst James Steel predicts an average price of $1 760/oz and expects the market to remain volatile.

He adds that among the reasons for his prediction are the easing of monetary policy by major central banks; the likely recovery of Indian consumption; strong Chinese demand, based on the Asian giant’s growing GDP; and strong demand from central banks, particularly in emerging countries, which will keep accumulating gold as a strategy to diversify their foreign exchange holdings.

International banking firm Morgan Stanley analyst Hussein Allidina says that gold will be the best commodity in 2013 as the US dollar is predicted to come under pressure.

He adds that central banks’ preference for gold as a reserve portfolio asset is expected to strengthen gold investment demand.

“The physically backed exchange-traded funds are likely to remain a solid basis for growth in investment and retail demand and, finally, the Indian jewellery and investment market is likely to show signs of recovery as Indian purchasers acclimate to recent price trends and the Indian wedding and festival season lies ahead,” Allidina is quoted by Business Insider as saying.

He predicts an average price of $1 853/oz.

US-based bank Goldman Sachs expects the gold price to be driven by the opposing forces of more US Federal Reserve (Fed) easing and a gradual increase in real rates on better US economic growth.

The bank indicates that the improving US growth outlook will outweigh further Fed balance sheet expansion and adds that it is difficult to call a price peak because of the increased risks to its growth outlook, particularly with regard to a possible fiscal cliff.

Goldman Sachs expects gold to decline in 2013 and reach $1 625/oz by the end of the year, but in case of a weaker US growth outlook, it predicts prices will trend higher at $1 900/oz.

German global banking company Commerzbank’s commodity analysts predict an average price of $1 950/oz, adding that the price will likely increase above $2 000/oz for a brief period.

It says the debt crisis in the eurozone and the geopolitical risks in the Middle East are drivers of a sustained demand for gold as a ‘safe haven’.

Canadian World Bank ScotiaMocatta says policymakers are intent on finding the least painful solutions to debt problems, which are likely to involve reducing the debt burden by devaluing it, resulting in creditors diversifying away from fiat assets. The bank predicts possible $2 200/oz prices during the year.

“Gold could break its previous record high, but the potential for further upside may be limited thereafter,” says France-based BNP Paribas analyst Anne-Laure Tremblay, adding that the timing of the gold price peak will be closely linked to the rate of improvement in the G3 economies.

The German global bank, Deutsche Bank, predicts a $2 000/oz gold price, based on the assumption that more money will be printed in order to sustain the economic recovery with stimuli.

Besides the US dollar, other factors that affect the gold price are the value of other currencies, the price of other commodities, such as oil, economic situations and world events, including dramatic weather influences and war.

Provided there is inflation, currency manipu- lation, economic upturns and downturns, the general consensus is that gold will continue the upward trend it has experienced over the last 100 years.

Although gold prices fluctuate constantly, the LBMA fixes the price twice a day for trading purposes. The five current participating members are ScotiaMocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale.