Strikes at South African gold mines do not mean higher prices
Strikes at South African gold mines do not mean higher prices April 1, 2005 Paul van Eeden
You probably already know that 20,000 mineworkers at Harmony Gold's Free State operations (in South Africa) are on strike. The National Union of Mineworkers (NUM) is threatening to expand the strike action to all of Harmony's operations, affecting as many as 50,000 workers.
A similar NUM strike at Gold Fields that caused 30,000 workers to walk out on Wednesday was called off on Thursday after a court labeled the action illegal. There are strict rules that both sides (the mines and the NUM) have to abide by in order for a strike to be legal.
South African mine production currently accounts for about fourteen percent of global gold mine output, with Harmony producing roughly one quarter of all the gold in South Africa. If the strikes at Harmony continue and impact all of Harmony's mines, global mine production of gold could be reduced by three to four percent -- temporarily, of course. Should the NUM be successful at reinitiating strikes at Gold Fields, half of South Africa's gold production could be at stake, or seven percent of the world's mine production.
These strikes are in response to proposed job cuts by Harmony, and are also an attempt to coerce the mining companies to increase wages by raising the living allowances paid to workers. Labor contracts for the gold mining industry in South Africa are negotiated primarily between the mines and the labor unions, of which the NUM is the largest. The current labor contracts expire in July this year and when the mines and the unions begin their labor negotiations, strikes are often called to put pressure on the mining companies. This year we are seeing tension between the companies and the unions before the labor negotiations even start. Or perhaps this is the start.
If labor negotiations get particularly ugly this year we could see strikes initiated at Harmony, Gold Fields and Anglogold. If the strikes continue for an extended period of time, would the resulting loss of gold production cause the gold price to rise across all currencies?
A general strike in South Africa back in 1987, when South Africa produced forty percent of the world's gold, caused the gold price to temporarily rise by almost ten percent. I find it hard to believe that a temporary loss of gold production from South Africa would have a very material impact on the gold price these days when South Africa only produces fourteen percent of the world's gold.
What's more, there is virtually no evidence that minor, short-term changes in mine production have any lasting impact on the gold price. Looking at the data from 1990 onwards I found no correlation between the difference between mine supply and fabrication demand and the gold price. See "Gold, a commodity?" at http://www.paulvaneeden.com/displayArticle.php?articleId=47 for more details.
In the unlikely event that we do see a spike in the gold price due to labor unrest in South Africa, remember, it's a spike. It's not the marker of the beginning of a long-term increase in the gold price. If the gold price rises in anticipation of a general strike in South Africa it will most likely decline rapidly soon afterwards.
Gold mining is very important to the South African economy. Both the mining companies and the labor unions understand this and as much as they'll threaten each other and poster, they will resolve their differences and life will go on.
From a practical standpoint, as investors, rather than looking at the labor situation and wondering what impact it will have on the gold price we should be looking at those companies that appear to be taking it on the chin, but that we know will not get knocked out: Harmony and Gold Fields.
If you've been waiting for a good opportunity to buy South African gold stocks I suspect you're looking at one right now. And between now and July, when labor negotiations start in earnest, you may get an even better one.
That's not to say the South African gold stocks have bottomed. But they're certainly a better investment today than they were six months ago. I'm also not advocating buying South African gold stocks. I'm not convinced that the strength in the South African rand is behind us, and the combination of currency risk with the social and political risk in South Africa makes South African gold mining stocks unattractive in my opinion. But that's just my opinion. The point is that if you're going to buy South African gold stocks then buying them during labor negotiations, when they typically get trashed in the news and whacked in the market, is a much better strategy than buying them when everyone loves them.
Considering the gold Production link 4god posted if there was a production of 1200 metric tons of gold in 1774 and as of 2001 there was a summit of 2600 metric tons of gold produced that would entail about 216% delusion of the gold market since 1974. Considering the inflationary rally of the commodity markets over the last 3-4 years if we discounted this amount of gold in the market we would expect to see a gold price of $989.88 per troy ounce. So if Gold Miners ceased operation as of 1974 and no new gold was brought out into the market Gold would effectively be trading at $989 when it reached its top in Dec. There is your power spike.
Because gold is not destroyed and it is stored it is dilutive. The momentum of the recent rally does not mean gold still has more to go, miners have put out so much gold that it is slow to move. Similar to the difference between a stock with an Float of 2 million as compared to 2 billion.
So that kitco commentary is absolute BS when they are quoted as saying "Meanwhile gold is so darned low in real terms that it hasn't even returned to mid-1990s levels yet! The folks who claim gold is expensive apparently don't understand inflation." Apparently they do not understand inflation if they don't see that gold production in disruptive to price.
No wonder Miners are hedging themselves in the gold market. It's like insiders who short the crap out of the stock through an offshore fund before they dump several million shares. They know what is going to happen and they are doubling up on their profit potential. At least he gold miners are off setting their revenues in production through a hedging instrument. At least it keeps them solvent for that much longer.
Market Data 
Markets 
AI
