Will SA be the land of gold rush 21?

Business Day on Monday quoted research by Umvoto Africa which states that SA does not sit on 36,000 metric tonnes of gold reserves as the Chamber of Mines claims - but rather sits on just under 3,000 metric tonnes. 36,000 tonnes puts SA right on top of the pile compared to the rest of the world, but 3,000 tonnes sticks SA in fourth place, behind Peru and Russia. I haven’t gotten my hands on this report, but I’ll examine briefly what Business Day quoted.

Umvoto claims because the Chamber of Mines comes wielding old data – which has been unchanged since 2001 – it can’t be trusted. But one check of the facts proves otherwise. Wits Gold Limited, a gold exploration company with resources in the Witwatersrand basin, has proven gold ore reserves of 152 million ounces, or 4,309 metric tonnes. So Wits Gold alone sits on more than what the entire SA has in gold reserves, if Umvoto’s figures are to be trusted. I won’t even spend time going into details of other mining and exploration companies which sit on large gold ore reserves in SA. It could be that Umvoto are only looking at gold reserves that are accessible at current depths and technologies.

While it is a fact that the SA gold mining industry has been in decline for many years, it is also a fact that the reason the industry has been in decline is because it is increasingly more expensive to mine deeper underground to bring the yellow metal to the surface. With a gold price in the region of $1,500/oz keeping oil and electricity costs and the rand exchange rate broadly unchanged at current levels, the SA gold mining industry will have a revival of note as gold rush 21 kicks off in earnest.

Take David Rosenberg’s “what if?” scenarios on gold into account when you ponder the revival of SA’s gold mining industry. Necessity will spur technology and innovation to get to the deep gold ore that is currently inaccessible, or unprofitable to mine.

If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.

If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.

If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.

Rosenberg’s scenario’s are by no means far fetched.  In fact, we would consider these FX reserve adjustments to be normal by historical standards and some would even consider $2,750/oz as an uber-conservative forecast. What would a $2,750/oz gold price do for the SA mining industry? Would 4,000 metres be too deep and costly at this price? Would there be 3,000 or 36,000 or 60,000 tonnes to be found underground at this price?

UPDATE: Meanwhile the guys at GATA are not taking a firm view either way on the issue, and MineWeb fleshes out the story in more detail…

Still no word from the big mining houses on the issue, and, more importantly, still no major reaction on the rand and gold market. 

Watch this space.