Metallon is focused on gold mining and the single most important driver of Metallon’s earnings and its ability to generate cash flows is the market price of gold.
Like most commodities, the price of gold is driven by supply and demand, however unlike most other commodities, saving and disposal play a larger role in affecting the price than its consumption. In 2012, investment demand (consisting of bar and coin and gold-backed Exchange Trades Funds) accounted for 35%, central bank gold purchases accounted for 12%, jewellery accounted for 43% and use in technology/manufacturing accounted for around 10% of gold demand. (World Gold Council)
The gold industry is currently undergoing change and the mining sector is facing multiple opportunities and challenges. Increasing costs and higher expectations from a wide range of stakeholders could call in to question the viability of some projects and lead to a contraction in supply. Demand however is increasing, fuelled by; expanding middle classes in Asia, diversification of reserve assets by central banks and a growing desire for physical gold amongst many Western savers.
We believe that gold’s value as jewellery and as an investment vehicle will continue to increase. We believe this upward trend will continue for the following reasons:
Gold is extremely rare
Gold has been attractive since it was discovered. Since the beginning of recorded history people have sought gold as a store of value and wealth. Gold is attractive because it is so rare – estimates of all the gold ever mined total around 170,000 tonnes – not even enough to fill two Olympic‑sized swimming pools.
Limited supply of gold and gold production is declining
2001 is seen as the peak of global production and since then a general downward trend has been experienced. New gold discoveries are in decline, there have been cuts in exploration budgets, and it takes longer and is more costly to build new mines, with average mined gold grades coming down.
Store of value and wealth
Gold has been used throughout history as money and there is worldwide acceptance of gold as a safe store of value. As the public loses faith in debased paper currencies, the clamour for gold will increase exponentially. Also fuelling demand are the world's central banks, which in a major trend reversal have now become net buyers of gold instead of sellers. Central banks in China, India and Russia are buying gold as they divest of dollar holdings. Central banks are also encouraging its increasingly affluent citizens to buy gold.
A hedge against inflation and US dollar
Large fiscal deficits and the worldwide easing of monetary policy could lead to inflation. This situation would increase the demand for gold as it is viewed as a hedge against inflation. It is generally accepted that the price of gold is closely related to interest rates. As interest rates rise the general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. Gold is also bought and sold in U.S. dollars, so any decline in the value of the dollar typically increases the price of gold.
A safe haven
Global markets are likely to continue to be volatile and gold is seen as a safe haven. Bullion, investment grade gold and rare coins tend to outperform other investments during times of economic uncertainty. In fact, many refer to gold as the "crisis commodity" due to its excellent resilience through difficult periods in recent economic history.
Increased demand for gold jewellery
Most of the world’s gold is used in jewellery production, approximately 43%. Jewellery demand climbed to the highest in 5 years in 2013, driven by stronger consumption in Asia and the Middle East.
Increased buying by the BRIC countries
The BRICs (Brazil, Russia, India and China) hold significantly lower gold reserves than the more developed countries, instead holding the US dollar. As they identify a need to reduce their exposure to the dollar and move to a safe haven, we believe they will turn to investing in gold.
Metallon also believes that responsible gold mining can play an important role in achieving sustainable socio‑economic development in all the countries where gold is found. Gold, produced in conformance with high safety, environmental and social standards, provides opportunities in the form of jobs, skills, improved infrastructure and tax revenues. Through such direct and indirect economic contributions, professional gold mining benefits nations, communities and individuals.
Moreover, mining tends to generate large numbers of indirect jobs and to have significant multiplier effects in part because many mining jobs pay well and are highly skilled. This is particularly the case in developing countries. In Ghana one mining position supports an estimated 28 other jobs and livelihoods in the country and in Peru about 19. In South Africa mining supports about 1.4 million direct, indirect and induced jobs, and each of these jobs supports on average around nine dependents.