Gold: rise and rise again

The gold price set new records in 2010, and continued to do so during the first three months of 2011. This sequence has extended the upward trajectory that began in 2001, according to the latest Gold Yearbook published by New York-based CPM Group.CPM says that the sharp increase in the price, which is now at around US$1,400/oz, has been driven largely by an increase in investor demand for the metal. Global economic activity showed signs of recovery during 2010 but, despite these improvements, there remain heightened investor concern about the possibility of another recession and worsening financial market conditions. Fiscal, monetary, trade, currency and political imbalances that had built up over several decades, have resulted in currency market volatility, which increase the demand for safe haven assets like gold.Gold prices rose almost 30% in 2010 from US$1,096/oz to US$1,421/oz, with the record high for the year occurring on December 31. This record price for 2010 was broken on the first trading day of 2011, when gold prices settled at almost US$1,423/oz.After reaching this record price, gold declined, for the most part, during the rest of January 2011. CMP attributes this decline, in part, to “investor sentiment shifting from being extremely pessimistic during 2010 to being perhaps overly optimistic about economic prospects at the beginning of 2011”Many of the political and economic issues of 2010 remain unresolved, the group added, and are expected to come back into investor focus, driving investment demand and the prices of gold higher, at least during the remainder of the first half of 2011.Recent developmentsThere were several key developments and trends in the gold market during 2010, CPM says, the most important of which, for the price of gold, was a sharp rise in investment demand from already high levels. Firm investment demand, a key price driver for the past decade, coupled with official sector net purchases of gold, helped push prices to historically high levels last year. A move by central banks, since 2008, away from being net sellers to net buyers of gold, has aided the upward trend in prices, the group says.Investment demand and official sector additions totalled 44Moz in 2010, slightly below the previous record of 44.1Moz of total stock demand in 2009. This year could see such total stock demand reach a record high of 45.6Moz, as both investors and monetary authorities have been buying gold on concerns about financial, economic and political conditions. In addition to safe-haven buying, demand has been boosted by the array of investment avenues now available, CPM says. Five exchanges began trading gold contracts in 2010, and three exchanges introduced mini contracts, which allow smaller investors to participate in the gold market amid the high price of the metal. Collectively this was the largest number of futures contracts to be launched in any given year since the early 1980s.Another major gold-market development in 2010 was a decline in secondary recovery from gold scrap. After rising for three consecutive years between 2007 and 2009, gold secondary supply declined in 2010 by 2.1%, CPM says.The group attributed the decline to both the rise in gold prices, resulting in some consumers holding onto their gold in anticipation of even higher prices, and to consumers in developing countries, which account for a majority of the secondary supply, holding onto their gold in the face of rising domestic inflation.In addition, a lot of consumers holding gold in jewellery and decorative objects, and who were inclined to sell gold, had already sold their gold over the previous several years. ETFs remain attractiveExchange traded funds (ETFs) continued to attract investors during 2010, CPM reports.Combined gold ETF holdings stood at 70.5Moz at the end of 2010, an increase of 11.3Moz from the end of 2009. This was, however, less than the 19.8Moz added to holdings in 2009. A couple of factors contributed to the higher additions made in 2009, compared with 2010, CPM says. Given the safe-haven quality of gold, there was a sharp increase in investor demand for the metal at the peak of the global recession in the first half of 2009, with investors around the world rushing to buy gold to protect themselves from the negative consequences. This resulted in tightness in the physical gold market, especially for small bars and coins, driving more investors toward physically backed ETFs. Investors had added 14.8Moz of gold to their ETF holdings during the first three months of 2009, which was around 75% of the total net additions made to ETF holdings during that year, CMP says. The rising and high price of gold in 2010, compared with 2009, meanwhile, deterred some investors from purchasing as much gold by volume in 2010, even though they may have been investing similarly sized amounts of dollars in gold as they had been the year before. “The average price of gold during 2010 was 26% higher than in 2009,” CPM reports, adding that even with the reduction from 2009's volume level, the amount of gold investors added to their ETF holdings during 2010 was the second highest on record.“Even though the recession ended in 2009, investors did not really believe this, and remained extremely anxious about the sustainability of global economic growth during all of 2010,” the group says.There still were several concerns regarding growth in developed economies, as these countries tried to recover from the negative consequences of their fiscal and monetary imbalances. Market participants feared that the global economy could slip into another recession, being commonly referred to as a potential ‘double dip' recession. Currency market volatility, US economic and financial problems and the European sovereign debt crisis were all issues that kept investors interested in gold.Investors added 10.8Moz, or 95%, of the total net additions to gold ETF holdings during the June and September quarters of 2010, when negative sentiment was at its peak.Sentiment improved only during the last few weeks of 2010, before shifting to extremely positive by the beginning of 2011.In January 2011, gold ETFs holdings fell by 2Moz, and at the end of January the cumulative gold ETF holdings stood at 68.4Moz, down 4% from the peak of 70.9Moz of total gold held by ETFs on December 20, 2010.Despite these liquidations, that are likely to occur from time to time depending on how concerned investors are regarding the economic environment, ETF holdings are expected to remain at elevated levels during 2011.Net additions to ETF holdings are likely to be less robust in 2011 than those seen during the past few years. Nonetheless, physically-backed ETFs are expected to remain popular.Production expandsGold mine production is forecast to reach 83.3Moz in 2011, with new projects due to enter production and adding 4.6Moz to global output. Strengthening gold prices have encouraged expansions at existing mines as well as the start up of new operations, helping to boost output. CPM estimates that around 30 mines will begin production in the coming year.China continues to reign as the world's largest gold-producing country, and its gold mining industry has grown prolifically over the past 50 years from just 250,000oz/y to almost 11Moz in 2010.The country overtook South Africa as the world's largest gold-producing nation in 2007, and has remained at the top ever since. Development in China's gold-mining industry owes much to the market-oriented reforms of the Chinese government, CPM Group says. In the early 1990s, the Chinese government de-centralised control over production, and, recognising the restraints on technology and capital within the country, opened up gold exploration and development to foreign companies in 1994.Expansions in the country's gold sector have also been facilitated by continuous exploration of its geological resources. China has a total of some 201Moz of gold in recoverable resources, according to figures from the Ministry of Industry and Information Technology, with many of the recoverable gold deposits being concentrated in a few northern and eastern provinces. Output was hit by a number of supply disruptions in 2010, although this does not appear to have cut overall growth in the sector.One of the most significant disruptions in 2010 was the temporary closure of Zijin Mining Group Co's Zijinshan gold and copper mine in the Fujian province, in July.The closure followed an acid-waste leak from the mine's copper plant, which entered the Ting River and was responsible for poisoning almost 2,000t of fish stocks.Zijinshan is one of China's largest gold mines, producing 578,700oz in 2009. The company has been fined Yu30 million (US$4.5 million) for the incident and anticipates it has lost more than 32,000oz from total 2010 production.This year the mine will be subject to environmental clean-up procedures as well as a plant upgrade before returning to full production.Eldorado Gold Ltd is one of the more established foreign mining companies operating in China. The company's three operating mines (Jinfeng, Tanjianshan and White Mountain) are expected to be supplemented by the start-up of its Eastern Dragon mine this year.The three operating mines produced approximately 358,000oz in 2010, with this expected to increase to around 380,000oz this year.Eldorado says it expects to complete construction at the Eastern Dragon project before the end of 2011 and then process 40,000t of ore at 17.38g/t Au and 132g/t Ag. Capital spending for 2011 to complete project construction is estimated to be US$62.5 million, the company says.Australian production boostAustralia has established itself as one of the world's top gold producers, producing in excess of 8Moz in 2010. The country has a number of established producing mines, but these were supplemented by new operations entering production in 2010.Newcrest Mining Ltd is Australia's largest gold producer. To the end of December 2010 the company produced a total of 1.2Moz from its ten operations, seven of which are in Australia. Other major operators in the country include Newmont Mining Corp, Barrick Gold Corp and BHP Billiton.The growth in Australian gold production in 2010 can be attributed to a number of projects entering production.Newmont's Boddington mine, which began production in 2009, continued to ramp up throughout 2010 achieving total output of 728,000oz for the year. This was below the original target, owing to unscheduled mill maintenance in July and August. However, when the mine reaches full production of around 1Moz/y it will be Australia's second largest producing mine. New mines to come on-stream in 2010 include three at more than 100,000oz/y each.Saracen Mineral Holdings Ltd began production at its Carosue Dam project in early 2010 and at full production expects total output of 120,000oz/y.Navigator Resources Ltd also started production at its Bronzewing mine in April, with planned full production of 100,000oz/y over a five-year mine life.Meanwhile, Catalpha Resources Ltd officially opened its Edna May mine in Western Australia in August 2010.At the beginning of this month, Archipelago Resources plc poured the first gold at its 95%-owned Toka Tindung mine in North Sulawasi, Indonesia. The company reports that the plant is operating “in line with expectations”, and that throughput will be steadily increased “in accordance with the ramp-up schedule”Toka Tindung has a resource of 1.7Moz, of which 1.1Moz will be minable by open pit. The company is targeting production of 110,000oz gold equivalent this calendar year, with an annual average production of 160,000oz gold equivalent over the first six years of the initial eight-year project life.Declining output in South AfricaWhile China and Australia have been experiencing growth in their respective gold industries, South Africa is one country where production has been declining. Indeed, gold output there has been in decline for the past eight years, and has now reached the lowest level in more than a century.The decline has been attributed to falling ore grades in the country's established mining districts as well as problems with power and labour shortages.In February last year, the National Energy Regulator of South Africa (NERSA) approved a series of tariff increases over the next three years to help national utility company Eskom fund its expansion programme.Although the rate rise was lower than expected, increases of 24.8%, 25.8% and 25.9% for the three-year period were approved. The tariff increase is expected to put even greater pressure on South Africa's gold producers, squeezing operating margins.When the rates were announced, Harmony Gold Mining Co Ltd, one of the country's leading producers said it would place some of its operations under greater pressure.South Africa's mining industry also continues to face criticism over its safety record. However, fatality rates are improving, with 128 workers killed in mines in 2010, a fall of almost 25% compared with 2009, according to the Department of Mineral Resources. The government has increased its focus on safety over the past few years, introducing a national safety audit in 2007 and temporarily closing operations to investigate any incidents that do occur.Legislation was introduced in 2009 to simplify the existing regulatory regime. The legislation also introduced stricter criminal liabilities for mine managers and chief executives, including prosecution. Mining companies have also vowed to reach the same performance standards as Australia and the US by 2013.Despite the growing pressure on production, some operations are expanding. Gold Fields Ltd's South Deep mine produced 264,800oz in the 2010 financial year, but the company anticipates output reaching 350,000oz in the financial year to end-June 2011.The company is working towards a production target of up to 800,000oz/y by 2014 and has allocated R8.5 billion (US$1.2 billion) to the project. The funds will be used to deepen the shaft, develop a new tailings facility, upgrade the plant to a capacity of 450,000t/mth, and to develop and install additional infrastructure around the shaft.Gold One International Ltd is also increasing output at its Modder East mine near Johannesburg, with plans to reach 120,000oz this year. The mine began production in 2009, with 2010 being the first full year of commercial production.Despite a five-week long wage strike in the first half of the year, the company produced 66,445oz in 2010, primarily from Modder East.Exploration spending increasesThe rate of gold discoveries, both in terms of total ounces discovered and number of deposits found, has been declining since the late 1980s, CMP reports.The rise in gold prices since 2003 has led to an increase in the number of gold discoveries being made globally since that time, although it remains significantly lower than the discovery rates during the late 1980s and early 1990s.Dollars allocated to gold exploration rose on a year-on-year basis in all years between 2002 and 2010, except for 2009, CMP says, with the anomaly in 2009 attributed to the global financial crisis.As the gold price continued to rise, however, funds allocated to gold exploration declined by 28% in 2009, compared with a decline of 51% in total funds allocated to other nonferrous exploration budgets. During 2010, the total global nonferrous exploration budget is estimated to have reached US$11.2 billion, according to figures released by Metals Economics Group (MEG).In 2010, global economic fundamentals continued to spotlight gold, and near-historically-high prices prompted gold explorers to increase their aggregate budget by US$1.9 billion, MEG says. This increase lifted planned spending on the metal to US$5.4 billion and its share of total budgets to 51%.This is the first time since 1999 that gold has accounted for more than half of total planned spending, MEG reports.Furthermore, CMP adds that an improvement in the overall global economy during 2010, and the expectations of continued improvements during 2011, not only helped increase investor appetite for risk during 2010 but is also expected to continue boosting availability of risk capital in 2011. This is an important factor in driving exploration spending, CMP says, as junior mining companies, which are heavily reliant on equity financing, have accounted for a large portion of the total global exploration budget. Poor economic conditions and the severe disruption in financial markets during late 2008 and 2009 reduced the junior mining companies' contribution to the total global exploration budget that year, but this was reversed in 2010.There is a possibility that the discovery of gold deposits will reach the levels seen in the late 1980s and early 1990s, CPM predicts. CPM says that the global economy being in recovery from the recession, and gold prices at historically high levels, are “conducive to making new gold disc

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