The Impact of South Africa on Precious Metal Markets

For anyone who has bought or invests in precious metals, the country of South Africa will eventually come to the forefront, either as a source of the metal or as a significant influence on the metal’s spot price. So it should be no big surprise that when South Africa starts to have production problems, it has ripple effects across the entire international market for precious metals.

The country of South Africa has been historically blessed with a vast supply of minerals and related deposits, many of them rich with metals and diamonds that modern society puts great value on. Knowing what it had early on, South Africa has long controlled the production, harvesting and release of diamonds and precious metals, controlling the price of each with supply and demand influence and trying to capture the highest value possible.

Today, South Africa is estimated to be in control of more than 95 percent of the world’s stock of platinum and at least 12 percent of the worlds gold.

Labor Problems
Despite its riches, the South African mining industry has been suffering from repeat problems with labor and mining management issues (http://www.marketwatch.com/story/what-strikes-in-south-africa-really-mean-to-metals-2012-10-19). The issues vary and are not simple problems caused by an occasional labor strike. Instead, a smorgasbord of problems has been combining, making mining production for the country harder and harder over the last few years and months.
Monex Live Gold Prices
Labor strikes and problems started at a serious level in August 2012, impacting both gold and platinum mining areas with serious, extended shutdowns. The first strike occurred at the Marikana Mine but it spread very quickly to other locations and operations, particularly among platinum harvesting operations. These strikes were not simple picket lines and work stoppages. The Marikana Mine strike went ugly and 34 people were killed in the clashes between miners and police forces (http://www.businessinsider.com/why-south-africas-mining-strikes-reveal-a-much-bigger-problem-2012-9). By the time the stoppage kicked into full gear nationwide, more than 75,000 miners walked off the job. Less South African mining occurring means less production and metals to the world’s markets.

Mine Safety
South Africa has been digging into the earth for a long time, going far deeper for mining than many other countries have managed. As a result, the risk involved continuing to dig at the end of these tubes is far higher, especially for mining disaster, trapped gas release, and tunnel collapses. While the world focused on trapped mining crews in South America and China, South Africa had its own mining disaster, unfortunately losing 63 miners in the event. This in turn has caused the government to shut down unsafe mines until conditions are improved, which in turn has curtailed production supply from those affected mines.

Production Impacts
Platinum is directly affected by what happens with supply in South Africa. As a result, the metal’s spot price has been rising steadily thanks to the production fluctuations that the country has been suffering in the last year (http://www.voanews.com/content/platinum-markets-rocked-after-south-africa-mining-strike-shootings/1500319.html). The losses of new production are severe; in 2011 the country produced almost 4.5 million ounces of platinum, but in 2013 only 400,000 ounces are expected to be put to market. Because platinum is both a precious metal as well as resources for finished automotive products as well as other needs, the cut in supply will have a dramatic effect on market spot pricing.

The Palladium metal market also sees a serious contribution from South African, with more than one-third of the world’s supply coming from the African continent country. This metal is also used in automotive production, which also adds to the demand as well. Similar to Platinum, South African Palladium production has also been curtailed, reducing the supply versus 2011 by almost 8 percent. This too will help drive up pricing if demand remains steady for existing supplies.

The South African Kruggerand has long been a standard of premium gold around the world, representing South Africa’s strong presence in the gold market. Today, the country is expected to have an output of close to 190 tons of new gold, down from a previous level in the 1970 of 995 metric tons of the yellow metal. While the world is still finding another 2,500 tons elsewhere from other countries, the loss of South Africa’s play in supply has contributed to the rise on gold value.

What South Africa Means for Investors
Palladium up until 2012 has been fairly lagging behind gold and platinum. However, once the South Africa mining issues began, the metal started also climbing in spot market value per ounce. At the beginning of February 2013 the metal had moved up to $750 an ounce, a significant move from where it was in November 2012 (http://moneymorning.com/2013/02/06/investing-in-2013-why-you-cant-ignore-palladium/). The current shortage is expected to keep the grey metal’s valuation rising through the year, further augmented by another player: Russia. Along with South Africa, Russia has a big stake in palladium production for the world. However, the Russian supply is now giving signs of being officially wiped out. Unofficially, some are thinking the Russians are holding back supply to enjoy the much higher pricing with tightly controlled sales. Whichever the case, South Africa’s mining problems are only contributing to the higher demand versus supply available.

Smelling a bubble rise, hedge funds have already been putting significant positions into Palladium to profit on the current rise. Fortunately, for the average investor, the curve has a ways to go. The supply restoration of Palladium is not likely to happen anytime soon, and carmakers continue to put out vehicles, eating up supply of the metal for specialized car parts, which also isn’t going away anytime soon.

Platinum has the same demand driver pushing it thanks to the South African mining issues. However, unlike palladium, platinum is far more unpredictable and wildly swings in pricing on the smallest bit of news (http://www.foxbusiness.com/news/2013/02/19/supply-fears-spur-platinum/). The metal can drop at the quickest sign of demand not materializing, but the metal jumps in price when another South African mine operation goes on strike. As a result, platinum is very much a trader’s metal, where the fast movement can provide short opportunities for risk and gain. However, that makes the metal a nightmare for buy-and-hold investors who want to aggregate gain over time. 2013 only offers far more fluctuation drivers, making predictability even worse.

If the South African gold mines completely shut down in 2013, it could restore gold’s position back near 1,700 an ounce. However, because the country has lost quite a bit of influence on the market over time and due to recent shortages, the impact won’t be near as severe as other metals. Instead, if South African gold mining starts producing again, it could actually drive gold prices down moving more supply onto the market versus stagnant demand. That in turn could drive an investment in gold at the beginning of 2013 into a loss position of hundreds of dollars per ounce.

In Summary
There is no question that South Africa has a finger on the pulse of precious metal markets. However, the influence works different than some assume, which means changes in South Africa could work to the disadvantage of precious metal investors rather than help them. Understanding how these issues can influence metal markets in 2013 can be made easier by tracking precious metal news on sites like monex.com. In today’s investment world, information is power, and investors in metals are far from immune from what happens on the other side of the world these days.

The Impact of South Africa on Precious Metal Markets
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