South Africa has great potential for gold mining, but increasing mining depth, high production costs and long lead-times have resulted in gold production declining markedly over the past three decades, despite extensive remaining mineral resources, says market development organisation for the gold industry World Gold Council chief market strategist John Reade.

“For many decades, South Africa was the world’s largest gold producer, with peak production in 1970 of 1 000 t/y of gold. Currently, the country produces less than 150 t/y and is in seventh place globally in terms of gold production levels.”

Owing to the increasing depth of local gold mines, the country will be required to deploy innovative mining technologies to safely and profitably extract the orebodies, he says.

Reade further points out that, as environmental and social governance issues are becoming increasingly important to gold mining companies, major operational shifts are being implemented to protect the environment and employees by creating sustainable pathways for mining.

“All-electric underground mines could be an important part of this, as companies begin to implement alternative energy sources and electrical equipment to eliminate the use of diesel, which should also contribute to a reduction of costs over a mine’s life.”

He adds that there will also be a focus among local mines on the shift towards a global ‘zero water’ initiative over the next three years, which aims to reduce water consumption to zero in mining operations.

Reade believes that community and government engagement “is more than just a buzzword” in the mining industry, with increasing recognition that, without a social licence, successful operations are more difficult to achieve.

Global Gold Market

Reade highlights that the first quarter of 2018 saw soft demand for gold globally, with overall demand down 7%, compared with the first quarter of 2017.

“On the supply side, global mine production grew fractionally to 770 t in the first quarter of 2018 and recycled gold supply remained flat, despite higher gold prices. The outlook suggests modest growth in global production this year.”

“Investment demand in the first quarter was down year-on-year, continuing the trend of late 2017, while global jewellery demand held steady as demand in China, and particularly the US, compensated for weaker jewellery demand in India.”

He explains that investment in the first quarter was mixed, with the decline in bar and coin investment more than offsetting a fifth consecutive quarter of inflows into exchange-traded funds (ETFs).

In the first quarter, central banks continued to add to global official reserves, demonstrating their highest first quarter for demand in four years. He also highlights that there was an uptick of demand in the technology sector, reaffirming gold’s vital role in wireless technology developments.

Reade notes that ongoing economic development in Africa should be positive for gold demand on the continent, and an improved gold market infrastructure in some countries would also help to grow the demand. “Our work has shown that gold demand is highly correlated to consumer income and wealth.”

He further highlights that the rise in geopolitical tensions in the Middle East and Asia often benefit the gold market, particularly when these tensions threaten oil supply.

“But the effects are usually short-lived and are difficult to trade profitably. Gold has a much better record as a safe haven from systematic economic crises and, while there are a number of possible candidates for such an event, we do not see anything in terms of a crisis on the immediate horizon.”

However, Reade points out several potential fault lines for the global economy, explaining that higher inflation, the second-longest US economic recovery on record and heightened global trade tensions could have a negative impact on growth in the longer term, and “any or all of these factors could bolster the demand for gold”.

Generally, the gold market is in a “good state”, but there are some challenges, such as buying patterns from younger generations, compared with those of older generations, Reade says.

“Although some manufacturers and retailers are doing good work to make gold attractive to younger buyers, there is more to be done on this front,” he emphasises, noting that many young buyers prefer experiences to material goods and online shopping.

He also indicates that the strength of some asset markets – especially US equities – is diminishing the attraction of gold as an asset class.

“This means that the industry must work even harder to ensure that investors have the most suitable vehicles to invest in gold, whether that is physical products like bars and coins; derivatives, such as over-the-counter accounts; ETFs or digital solutions,” Reade concludes.