SA shares may restate reserves after gold ‘hit’

[miningmx.com] – THE way it has been described by some of the
analysts, gold was subject of “a hit” last week in which the metal recorded its highest one day decline in 30 years.

“If you look at the nature of the selling, it’s almost as if it was bombed,’ says Chris
Hart, senior economist for Investment Solutions. “I’m not into conspiracy theories and the like, but you’d have to be naive not to think the markets aren’t being
manipulated,’ he added.

The good news is that most analysts remain positive on gold. “While the recent moves in the gold price are unsettling, we remain positive on the fundamentals for gold given that we do not believe that the world’s global economic problems have besn solved,’ said Investec Securities.

But what did happen last week when the price of gold slipped over $100/oz and
headed towards $1,400/oz – a level incidentally, some analysts believed gold equities had been factoring in for some three months previously.

On April 12, the gold futures market opened in New York to “a monumental’ 3.4
million ounces – about 100 tonnes – of gold selling. Immediately, technical selling was triggered; these are levels set by investors that when breached lead to mandatory
selling.

According to Ross Norman of SharpsPixley, a UK brokerage, a further 10 million
ounces blast of selling – about 300 tonnes – followed in just 30 minutes of trading.
“This was clearly not a case of disappointed longs leaving the market,’ said Norman.
“It had the hallmarks of a concerted “short sale’,’ he added.

The aim of such a daring short sale was to prompt others to panic and therefore put
bearish investment positions taken by the longs into the money, as it were. To gain an understanding of the scale of the trade, the estimated 400 tonnes of gold futures
selling is equal to 15% of annual gold mine production. In value, it was $20bn, just
short of R100bn, worth of trade.

The impact on South African gold shares was pretty dramatic. At the time of writing, a steady rebound in the good price was prompting some recovery but there’s no denying that local gold shares had been taking a pasting all year, partly owing to liquidations in gold-backed exchange traded funds which represent safer money in the gold market. To see them leave the market, hurt confidence in the gold price.

As an essentially monetary asset, gold’s success turns on providing an alternative to
the dollar. The continued presence of qualitative easing, where money is pumped (or
printed) into the US economy to stimulate confidence and liquidity, is the reason
expectations for the gold price were relatively good. The economic crisis in Cyprus
was another notwithstanding the possibility Cyprus could sell gold reserves to shore
up the national balance sheet.

If the gold price remains relatively low, however, there’s the question as to whether
South African gold shares will have to apply new gold price assumptions into their
economic models, issue such as mineable reserves and resources which ultimately
affects future gold production.

“If portions of reserves are then rendered uneconomic, it could mean less capital
expenditure in the future, but less production growth too,’ said a UK gold analyst who asked to remain anonymous.

Said David Davis, an analyst for SBG Securities: “The dilemma is that if the gold price remains low and inflationary pressures remain, then the margin will close and that will certainly compound pressures on reserves’. Davis has, for several months, been calling on SA gold companies to undertake sweeping restructuring. Even at previously higher gold prices, he thinks inflation is changing the industry.

So what now? All eyes on the gold market is the answer.

According to Norman, there’s a stand-off underway between the longs (those who
think the price of gold will go up) and those who think it will go down (the shorts).

Both sides have big bets to protect, a polarisation in the market that Norman likens to a tug-of-war. “At the end of the day, it is a question of who has got the biggest guns – the shorts have made their play – let’s see if there is any response from the longs to defend their position.’