Double Jeopardy: Gold Sales, The I. M. F. and Africa

"UK Chancellor of the Exchequer Gordon Brown has voiced his support for plans for International Monetary Fund (IMF) gold reserves to be used to finance debt relief for the world's 70 poorest countries."

are broadcast around the world; silly guys like me start thinking someone is speaking out of turn and start questioning their motives. That's because, in places like Canada - with our Parliamentary traditions - there is quite simply no precedent for the Canadian Finance Minister to spearhead humanitarian efforts of any kind whatsoever. His job happens to be largely budgetary or defending the currency [one might wish to say the fiat system - but that would admittedly be a stretch, or would it?], which strangely enough, is exactly what gold sales would have the effect of doing.

Forgetting the notion - for a minute - that the above looks to me like a square peg in a round hole; instead, let's look at the argument and judge it on its own merits. Brown claims that his intentioned IMF gold sales are primarily supposed to help poor countries in Africa. Well the guys over at GATA, like Bill Murphy, generally believe that, if anyone were truly concerned about the welfare of impoverished Africans they would discontinue their [alleged] covert gold sales allowing the price to rise to a level commensurate with natural supply and demand. A gold price two or three hundred dollars higher would go a long way to opening new mines in sub-Saharan Africa [where a substantial amount of the world's known gold reserves are located]. A significantly higher gold price would lead to substantially higher gold producer profitability. Some pundits have estimated this could put as many as 100,000 miners back to work. Each miner supports 10 to 12 dependents. Then, you have the economic multiplier effect from this increased gold mining activity and so on. I ask you, is this, or is it not a compelling argument.

The GATA people then go on to add: Stories like this are not new and regularly appear in the mainstream financial press. It has been widely speculated by GATA that these ubiquitous stories about "special gold sales" quite likely pose as cover for central bank reconciliation of gold that has already left the vaults, so to speak, whose return is impractical without creating a short squeeze in gold - imperiling the bullion banks, their clients and the global financial system at large. As usual, clarity from official sources on this front is NEVER forthcoming. So what do you think now?

Well, here's what I had the presence of mind to think and do in response to the above argument: At the recent international mining convention [PDAC], held in Toronto, Ontario, Canada [which I reported on for FinancialSense.com] - I decided to pay a visit to the South African Department of Minerals and Energy booth, to speak with someone there, on the record, regarding this issue. There I met Abe Mngomezulu, Ms. Bansi and spoke at length with Mr. Harding regarding the situation of proposed IMF gold sales.

Let it be known that I'm most concerned and sensitive to the fact that Trevor Manuel [S.A. Finance Minister] has recently come out in favor of, shall we say, "responsible dishoarding of IMF gold stocks" to help the poor. It is not the intention of this article to find someone within the government of South Africa to 'drive a wedge' or directly contradict what the esteemed minister is on the record supporting to score a political point.

Rob Kirby with Anthony Harding at PDAC 2005

Mr. Abe Mngomezulu, Deputy Director General
Dept. Of Minerals & Energy, South Africa

What I was seeking, was some input from someone with their feet on the ground, who interacts with the mining industry and government, who can see and feel the real effects of oscillations in the gold price first hand - and more importantly, what effects its having on the population. Instead of theorizing about the effects of a lower gold price or what more gold sales might do to the market, I decided to ask Anthony Harding, Deputy Director in the Mineral Economics Directorate of South Africa's Department of Minerals and Energy. Here's the unedited version of what he had to say:

The Whole Truth and Nothing But The Truth

Whichever way you look at it, the sale of approximately 900 tons of gold from IMF reserves is bound to have some negative influence on the gold market. This would be unfortunate for producers of the metal worldwide as the gold price is currently in a rising bull trend after spending about a decade in the doldrums; but miners based in South Africa and elsewhere in Africa are likely to feel the pinch the most.

The South African gold mining industry is more than a century old. Gold has played a pivotal role in developing the South African economy both directly through monetary earnings from bullion sales, which at one stage supplied the international banking system with the bulk of its reserve of last resort, and indirectly through spin-off effects which generated the birth of other important domestic sectors in the economy, such as financial services and manufacturing.

Although statistics show that South Africa has produced well over 40 000 tons of gold since the beginning of gold mining in the country and some 35 000 tons still remain in the ground to be exploited, the mining of most of these resources has been put at risk by a domestic rand currency that has strengthened against the US dollar by over 40% during the course of 2004.

As it is symptomatic of increased foreign investment in the country, the stronger rand is generally believed by most experts to be good for the economy. It has curbed inflation, generated much needed economic growth through higher levels of domestic investment and raised the level of optimism in most non-export sectors of the economy. Unfortunately, it has become very unpopular with the export sector, especially gold mining. Profitability on the gold mines has been squeezed from both sides: by falling rand revenues and rising costs, and the marginal operations in particular have suffered badly.

The Economics of Mining Deep Gold

Given the recent performance of the gold price, which appears to have run out of steam in its latest bull trend and assuming that a stronger rand has come to stay, the future of gold mining in South Africa faces an uncertain future as most of the higher grade resources of gold remaining in the ground will have to be mined from depths greater than 4 kilometers below the surface. Under this scenario these resources are unlikely to be developed unless the gold price increases to above $500 per ounce and stays there, underground mining costs are reduced considerably by the introduction of new, less expensive technology and finally, an important change occurs in the domestic economy over which the mining industry has no control, namely: the monopolies in certain key sectors supplying services to the mining industry disappear and make way for a more open and competitive domestic economy.

If the current and previous bull trends in the gold price are anything to go by, a steady price for gold of over $500 per ounce is not on the cards. Furthermore, most of the research and development conducted during the previous 20 years that has borne any fruit has been focused on opencast mining and metallurgy. The prospects of ever mining gold at ultra-deep levels (depths greater than 4 kilometers below surface) are thus becoming ever more remote. Clearly then, IMF sales of bullion from their reserves could be another negative event adding to the unlikelihood of a major recovery in South Africa's gold mining industry ever occurring in the long-term future. Under this scenario it is extremely likely that within 20 years the country's newly mined production could be contributing less than 100 tons of gold per annum to world coffers.

If the role played by gold in the South African economy is crucial, its importance as an exploited mineral resource to many other emerging economies elsewhere on the African continent is even more critical: Sub Saharan Africa (including South Africa) which has already produced over 40% of all the gold mined in the world to date and contains more than 50% of the world's identified gold resources also accounts for about a third of current global gold output per annum.

The new mines that have sprung up on the African continent during the last 10 years or more are usually at shallow depths and of an open pit nature These mines, which are spread throughout sub-Saharan Africa, from west to east, have received a much needed boost in earnings from gold sales as a result of the higher gold price without the deleterious effects of a strengthening local currency to erode the revenue streams.

A Delicate Balance

Many sub-Saharan countries fall into the heavily indebted category and thus intervention in the gold market through an event, such as IMF bullion sales, could have unintended consequences for those countries at the critical juncture of relying on the performance of their gold mining industries to encourage sustainable economic growth. Released from an inextricable debt burden or not, under a falling gold price scenario they would be unable to reap the hard won fruits of their economical aspirations in the future.

The most progressive of Africa's newly liberated economies, most of which are also the most democratic in outlook depend a great deal on gold to advance the cause of their economic development. That these economies should be seriously thwarted in attempting to elevate their economical and political performances to ever higher levels in an era favouring rampant globalization is therefore definitely not a desideratum.

It seems to me that Africa's developing economies having exploitable gold resources in the ground to call upon would benefit more by extracting and selling this gold in a market characterized by a rising gold price than from handouts received as a result of central bank gold sales, which may well restrict further upward mobility in the price. African countries should be allowed to develop their economies independently depending on their own new found strengths rather than be expected to rely on the largesse of the IMF which is mainly controlled by first world countries that have long neglected the economic problems plaguing the African continent.

Altruism appears to be behind proposals to sell gold from IMF reserves in the current gold bull market. But, one wonders how altruistic would these proponents of sales be about selling their bullion in a gold bear market

So there you have it folks, right from the horse's mouth - or at least someone who is 'there' - on the scene with his feet on the ground. Now you may all play the part of judge and jury as to who's delivering the straight goods on this subject.