A bright future for precious metals: the West's continuing economic growth represents good news for Africa's precious metal miners and gemstone producers who can anticipate buoyant markets for their products. Moin Siddiqi reports.

The markets for gold, silver, platinum and gemstones are all highly sensitive to global business cycles. Frenetic activity in times of booming consumer spending--particularly in the wealthy Organisation for Economic Co-operation & Development (OECD) countries--provides a welcome financial windfall for producers of these precious commodities.

Encouragingly, the major consumers of these commodities have all achieved robust growth over the past year, and a growing demand for bullion, diamonds and other precious stones can be anticipated. For example, the Chinese economy grew by 9.2% in 2004, India by 6.7%, and Saudi Arabia by 4.5%.

Within the OECD itself, the US economy grew at 4.4%, Japan's at 4.0%, and Britain's at 3.2%. In 2003, India was ranked as the world's biggest gold market, followed by Italy and America.

China is also emerging as a major gold market, with annual demand predicted to grow to some 600t within three years, reflecting rising prosperity in the major cities of Shanghai and Beijing.

The consumption of platinum group metals--used heavily in the automotive and electronic industries--has increased in line with global growth during 2003-04. The price of silver, a precious metal mainly used in jewellery manufacturing--has soared by 50% over the last year to $7.91/oz (troy).

Precious metals and gems are universally priced in the US dollar, and that currency's recent rapid depreciation against the world's major currencies such as the euro, yen and sterling, has reduced these commodities' prices further, in real terms, across the eurozone, Japan and Britain.

This has boosted gold's attractiveness to investors and consumers outside dollar-zone areas, and reduced local retail prices. That is important because the demand for jewellery is price-sensitive in Asian-Pacific markets.

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The dollar/euro exchange rate is largely driving the price of gold upwards. Bullion hit an 18-year high in early December of $457/oz, underpinned by the dollar's precipitous slide and an influx of speculative money from hedge funds. The price of gold has risen by about 80% from its low of $253/oz of April 2001.

Gold's potential to post further gains remains intact. Many in the market believe that should the euro break above $1.35-40 level, the gold price could reach $460-70/oz. Indeed, some market analysts envisage the precious metal soaring as high as $500 in coming months.

In fact, gold has regained some of its previous status as a 'safe-haven' investment amid turmoil in the forex markets, higher energy prices, and continuing geopolitical instability. As one analyst puts it: "It's effectively a financial instrument that behaves like a currency. When investors want to sell the US dollar and are not quite sure where to put their money, they put it into gold, even if just temporarily."

BULLION

Gold is produced in over 900 mines spread across the globe (the exception being Antarctica where mining is banned). Sub-Saharan Africa is an important 'gold-belt' region. It accounts for 45% of proven global reserves and 25% of annual production.

Global mined production, in 2003, totalled 2,593t. According to precious-metals consultancy, Gold Fields Mineral Services (GFMS), Africa's output was 596.4t, Asia--including China--518.6t; North America 415t; South America 414.8t; the former Soviet Union 311t; and Australia 285t. The top-five producers were South Africa (363t), the US (285.2t), Australia (285t), China (207t), and Russia (181.5t).

For 2004, GFMS estimates that global output may drop by 3% to 2,506t, partly due to problems at Indonesia's Grasberg mine (the world's largest) and reported losses in Australia and the US during the first-half of the year. But, referring to July-December exploration and production activity, GFMS noted: "A number of new mines in Mongolia, Suriname, and Uzbekistan, which are ramping-up production, should provide a reasonable offset, in the second-half, to lost output in some of the more mature mining districts."

The new 'rising producers' which include both Mali and Tanzania have all increased production.

On the demand side, GFMS reported that total off-take between January-June 2004 fell 4.8% to 1,939t. However, jewellery fabrication--accounting for two-thirds of gold use--rose 6.3% to 1,319t thanks to buoyant sales in Turkey, India and China.

Central banks and supranational bodies like the International Monetary Fund and Bank for International Settlements hold one-quarter of above-ground bullion stocks, estimated at 150,500t. This equates to a staggering 60 years of annual global mined output.

Major official holders are the US Federal Reserve Board (8,109t), Germany's Bundesbank (3,422t), Banque de France (3,015t), Banca d'Italia (2,444t), and Swiss National Bank (1,461t).

A new Central Bank Gold Agreement, among Europe's 14 central banks plus the European Central Bank, is now effective. The five-year accord limits total sales to 2,500t, or 500t a year.

The official public sector is no longer as an aggressive seller of gold reserves as it was during the late 1990s. As UBS's precious metals analysts comment: "We believe there is a strong possibility that the signatory central banks could end up selling less gold between 2004 and 2009 than the 2,000t they sold under the terms of the first agreement."

Producer 'de-hedging', whereby miners buy back their gold loans and/or reduce the amount of gold they sell in forward markets, has supported the gold price by restricting its supply. Between the late 1990s to early 2002, many miners were hedging their production, i.e. forward selling on the derivative markets, in anticipations of depressed prices.

A new report by GFMS and the South African investment bank Investec found that international hedge book in the third-quarter stood at 1,877t, compared to 1,997t as of end-June 2004. On a company basis, AngloGold Ashanti's combined hedge book fell by 62t, Barrick Gold by 51t, Newcrest Mining by 22t, Placer Dome by 19t, and Avgold by 18t.

Total de-hedging is being forecast at 400t in 2004. The report said: "Producer attitudes in general seem as hostile to hedging as ever. It [de-hedging] is also a good indicator of general market sentiment--you don't slash hedge cover if you think the price is going to slump."

The 2004 average price is expected to be $414/oz, up from $363.5/oz in 2003. Supply and demand fundamentals appear bullish. UBS reckons gold could hit $470/oz level during the first-quarter 2005.

GEMSTONES

Africa is central to the world's production of rough diamonds. According to preliminary data published by the London-based Mining Journal, Sub-Saharan Africa (SSA) accounted for two-thirds of the world's total rough diamond output, in value terms, during 2003. That output is valued at $5.78bn.

Major producers were Botswana ($2,240m), South Africa ($900m), Angola ($900m), Democratic Republic of Congo ($900m) and Namibia ($440m). Other important world producers were Russia ($1,610m), Canada ($650m) and Australia ($460m).

On the mining side, global production in 2004 is expected to reach 153m carats (ct), up 4% on the previous year. The value of new output is estimated at $9.5bn, compared with $8,57bn in 2003.

SSA produces more than half of good quality alluvial diamonds every year. Debswana--the world's biggest producer--is expected to produce over 31m/ct from three mines (Jwaneng, Letlhakane and Orapa)--jointly owned by the Botswana government and De Beers. The latter's eight South African mines should produce 14m/ct, up from 11m/ct in 2003. Over 50% of rough, polished and industrial diamonds pass through Antwerp (Belgium). Other trading centres are Johannesburg, Tel Aviv, Bombay and New York. The value of diamond jewellery sold worldwide exceeds $50bn a year. Principal markets are America, Japan, the Arabian Gulf and East Asian countries.

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PLATINUM

Platinum prices in 2004 rose to a record high of $885/oz, largely fuelled by institutional investment buying, coupled with increased demand from industrial and jewellery sectors, which comprise 53% and 34%, respectively, of the metal's usage.

The CPM Group, a New York-based research consultancy, estimates in its 'Platinum Group Metals Survey 2004' that total platinum demand will amount to 6.52m oz, against global supplies of 7.29m oz--giving rise to a sizeable 770,000 oz surplus. The consultants noted: "After running deficits for six of seven years (1996-2002) the market shifted to a small surplus in 2003. That surplus has blossomed into a record large surplus this year."

The makers of catalytic converters (components that 'scrub' car emissions) and other industrial platinum users--like electronics manufacturers, petroleum refiners and medical applicators--are all reporting healthy growth rates that will underpin the platinum market. South Africa, the world's top platinum producer, is forecast to contribute 5.13m oz, or 70% of the world's aggregate supplies. The top-three SA producers are Anglo Platinum (AngloPlat), Impala Platinum and Lonmin plc. AngloPlat has a annual production target of 2.9m oz by 2006.

Other important producers are located in Russia and North America. Russia's Norilsk Nickel accounts for one-fifth of annual platinum supplies.

In its 'Platinum 2004 Interim Review', Johnson Matthey (JM), the precious-metals refiner, offers a different market perspective. It anticipates a modest deficit of 40,000 oz in 2004, based on total demand of 6.47m oz against mine production of 6.51m oz in 2004. South African supplies are projected at 4.98m oz, followed by Russia (850,000 oz) and North America (360,000 t).

Demand from auto-makers for catalytic converters will remain pegged at around 3.5m oz, due to the increased sales of diesel-powered cars in Western Europe. (Diesel engined cars do not use catalytic converters).

The use of platinum for jewellery fell by 10% to 2.2m oz because of depressed demand particularly from the Chinese market. The average price of platinum in 2004 is estimated at $848/oz, compared to $692 in 2003. JM expects platinum to trade within the $760-880/oz range over the next six months.

PALLADIUM

Meanwhile, the market for platinum's sister metal, palladium, is heavily affected by both oversupply and large stockpiles. The CPM Group envisages total supplies surging by 10.3% to 7.21m oz, reflecting higher mine production in South Africa, Russia, the US and Canada.

Fabrication demand for palladium is forecast at 5.17m oz. The white metal's major industrial end-use is, like platinum, for manufacturing automobile catalytic converters. The auto-industry accounts for two-thirds of the metal's industrial usage. The CPM Group says: "On balance, the market appears to be experiencing large surpluses--2m oz in 2004--of new production and refined supplies.

These surpluses are likely to keep palladium prices somewhat depressed." However, renewed industrial demand has lifted prices from their lows of $150/oz in April 2003. The average price in 2004 is expected to be $235/oz, up 17% from the previous year.