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Gold Weak on Spiraling South African Mining Costs

Commodities / Gold & Silver Feb 15, 2008 - 08:16 AM GMT

By: Adrian_Ash


SPOT GOLD PRICES stayed in a tight $4 range ahead of the long President's Day weekend early on Friday, trading 1% beneath last week's finish as global stock markets held flat and bond yields ticked lower.

Crude oil moved to a five-week high above $96 per barrel on news that Chinese oil imports rose 1.8% in January.

"The stockpiles of [gold-bar] refiners in Zurich seem to be quite high," says William Kwan, a gold dealer at Phillip Futures in Singapore .

"They are probably sellers in the market right now," he told Reuters earlier, pointing to the severe drop in gold jewelry demand in India – the world's No.1 market – that's followed the 38% rise in world Gold Prices since August.

"If there's any reversal in prices," Kwan added, "the investment funds might [also] sell gold down."

Gold Prices at the Tocom in Tokyo today slipped 0.4% vs. the Japanese Yen to equal $914 per ounce for Dec. delivery after the Bank of Japan kept its interest rates on hold for the 11th month running at 0.5%.

The Nikkei 225 stock index finished the week 4.6% higher from last Friday while the Japanese Yen held near yesterday's one-month lows, losing more than 2% down for the week.

Over the last six months, according to Bloomberg data, the Tokyo stock market has shown a negative correlation with the Yen of 0.93, just shy of a perfect -1.0.

The connection means that investor confidence is near-equally mapped by Japanese stocks and currency trading. For Japanese investors wanting to Buy Gold today, the metal has now risen by 12% since the start of this year.

Also on the currency markets today the Euro hit its best level since Feb. 6th at $1.4665, pushing the Gold Price in Euros back to €620 per ounce.

The British Pound turned south from $1.9720 however – its own seven-session high – to hold the price of gold for Sterling investors £10 below last week's close at £463 per ounce.

European equities gave back early gains and bond prices rose, pushing the two-year Bund yield one point lower to 3.17% despite Axel Weber – president of the German Bundesbank, and a governing member of the European Central Bank – claiming that "current interest-rate expectations in financial markets do not reflect an appropriate assessment of inflation risks."

Across the Atlantic in the United States , "clearly the economy is on the edge of recession," said Alan Greenspan, former Fed chairman, on Thursday.

"We have a long way to go" before real estate prices hit bottom, the Maestro told an energy conference – even as his successor, Ben Bernanke, somehow knocked 175 points off the Dow by promising further cuts in the cost of borrowing.

High oil prices are also acting to drag on the economy, Greenspan added, calling them "a burden" and concluding that the US economy is now "growing at stall speed."

Ahead of the three-day weekend on Wall Street, today brings a raft of key US data, starting with Import Prices for last month.

Due at 13:30 GMT, the US import-price index is expected to show a rise of 12.8% from Jan. '07.

The United Kingdom this week reported the fastest import price inflation on record at 19.1% year-on-year.

US Industrial Production and Capacity Utilization will follow, but not before the crucial Long-Term Capital Flows data for December are released at 14:00 GMT . These figures – the long-term Treasury International Capital flows (TIC) – give a vital, if lagging, indicator of foreign demand for US securities.

Inflows collapsed by four-fifths in July; gave their worst reading in nine years in Aug. at minus $70.6bn; and then rose strongly in the autumn – even while US equity prices fell by nearly one tenth – as several Asian and Middle-East wealth funds moved in to support Wall Street's financial stocks. ( Read more about the Mass Governmental Subprime Bail-Out here... )

Back in the Gold Market , and on the supply side meantime, five gold mines in Zimbabwe were forced to halt operations today by severe flooding, while the Eskom energy company in South Africa – the world's No.2 gold producer – announced an emergency coal-buying program to beat the current power shortages.

A state-owned utility, Eskom wants to buy an extra 45 million tons of coal by 2009, growing its stockpiles to 20-days supply. The local I-Net-Bridge news agency reports that South African coal exports have shot to $140 from just $40 per tonne two years ago.

"Industry watchers predict the coal price may double [again] this year," it adds.

But quite apart from the current 90% energy cap imposed by Eskom, the "single biggest issue" facing South Africa miners today is the lack of skilled mining staff said David Brown, CEO of Impala Platinum, on Wednesday.

"We believe this issue requires engagement between both government and industry at a high level," he told Mining Weekly , because "costs would spiral out of control" if the skills shortage persists.

Brown expects unit costs across the entire South African mining industry – which produced 11% of the world's newly mined Gold Bullion in 2007 according to the Virtual Metals consultancy – to increase "more or less" by 12% to 15% annually for the "immediate couple of years."

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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