Gold & Silver Recover Fed Drop, South African Mining "In Crisis"

The PRICE of gold recovered overnight losses after the release of US Federal Reserve meeting notes in London trade Thursday morning, rising back to $1375 as major stock markets also rose with commodities.

The Dollar continued to strengthen, helping the gold price rally faster for non-US investors.

Reversing an earlier 1.5% drop, the gold price in Euros regained last Friday's finish above €1030 per ounce – the highest weekly close in ten.

Silver prices also rose back to last week's finish above $23.25.

"[The Fed] minutes were generally consistent with our view," says Goldman Sachs economist Jan Hatzius, "that tapering of asset purchases is likely to occur at the September meeting,"

But "The Fed has not settled on a September taper," says the Financial Times. Instead, the July 31st minutes show it is now "flirting with recalibrating its forward guidance to mitigate tapering fears."

In the bullion market, "It was correct that the [gold price] came off," says broker Marex Spectron, also commenting on the Fed minutes, "eventually making a low of almost $1355 before being rescued by a stronger than expected Chinese PMI number."

New data Thursday showed the manufacturing sector in China – the world's #2 gold consumer market – expanding for the first time since April.

"Gold is likely to stay choppy in the near term on thin liquidity," says a precious metals note from bullion market maker HSBC.

"While the metal remains above $1348," says fellow bullion dealer Scotia Mocatta, "we believe there is a high probability of gold making a move to $1416."

On the supply-side Thursday, shares in South Africa's second largest producer, Gold Fields, dropped almost 10% after it posted a loss for the April to June quarter.

Confirming the $300m purchase of Australian properties from world #1 Barrick, CEO Nick Holland also offered today to waive his 2013 bonus "in recognition of concerns" over how 9% of Gold Fields' giant South Deep mine was given to black investors three years ago to meet the national government's Black Economic Empowerment (BEE) targets.

Holland's bonus in 2012 was worth some $840,000.

The National Union of Mineworkers, which represents nearly two-thirds of South Africa's 140,000 gold miners, is currently demanding a basic wage of $800 per month – a rise of 60% from current levels according to Reuters.

Yesterday the NUM quit talks with management and said it will ballot members about joining tens of thousands of construction and auto workers already striking over pay claims.

"In other words," says a note from Germany's Commerzbank, "the fifth-largest gold producing country is soon likely to see supply outages."

"The [South African] gold industry is frankly in crisis at the moment," says Holland.

With global prices falling by a quarter in 2013, some 60% of the country's gold output– down by more than one half from leading the world a decade ago – was operating at a loss last month according to Business Day.

"When you talk about costs there are two elements," says diversified mining giant BHP Billiton's CFO Graham Kerr, speaking to Reuters.

"One is how you tighten your belt and make the easy changes. The second is productivity – getting more out of your existing people, your equipment and your infrastructure."

BHP this week announced a $2.2 billion cut to operating expenses for the year, helping offset an $8.9bn drop in operating profits due to lower base metal and other mineral prices.

In contrast to Western gold mining firms, who have been told by shareholders "we'd rather you not do M&A transactions" according to world #1 Barrick, Chinese mergers and acquisitions in gold have risen to new records this year, says Bloomberg.

"Price declines are good for key Chinese producers to buy overseas assets," the newswire quotes China #4 Zhaojin Mining's head of overseas resources development Chen He.

Back in the bullion market meantime, "Gold appears to be more stable these days," says a note from Swiss refining and finance group MKS, "with a reversal in ETF outflows and still strong physical demand by China, India and Turkey."

Bullion holdings needed to back the world's largest gold ETF – the SPDR Gold Trust – slipped 0.6% tonnes on Wednesday, edging back towards 54-month lows at 913 tonnes.

"We expect ETF selling to pick up again," said commodities analysts at Societe Generale in a report last week, "with the expectation of Fed tapering, rising real [interest] rates, and a stronger Dollar."

Adrian Ash

BullionVault

(c) BullionVault 2013

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