However, numerous factors have come into play since then, and Harding, and indeed most gold price watchers, are far more positive about the future of gold-mining for the next ten years.
Gold has seen a strong and steady increase since January last year, when it was averaging around $280/oz, to January this year – which saw the gold price climb firmly above the $350/oz mark.
The price has made a number of new mining projects viable and Harding believes that, should the yellow metal keep above this mark for the next decade, the outlook for gold-mining is indeed a positive one.
Gold producers have also expressed their con-fidence in a sustained gold price, and new projects and exploration activities are notably on the rise across the board.
The fundamental reason that previous predictions of the gold price are no longer valid is the continued structural weakness of the dollar as a result of the declining state of the US economy.
Weakness in global equity markets and, to a lesser extent, political troubles regarding Iraq, have also contributed to a higher-than-expected gold price. The gold price raced up to nearly $390/oz earlier this month, amid anticipation of war in Iraq, but this war premium effect is common and it was not surprising that such levels were not sustained.
In his address to Gold Fields’ shareholders for the December quarter, CE Ian Cockerill noted that the rise in the gold price has made it quite clear that gold appears to have retained its age-old reputation as a viable alter-native investment during times of uncertainty.
He added that the company expected this trend to continue for some time.
“After more than two decades of a gold bear run, investors are finally moving back into gold, mainly as a result of a lack of confidence in the US economy, which has been in a bull phase for nearly a decade,” states Harding.
For a long time gold was seen as a handicap – it had to bestored in vaults and did not make money.
The only money made out of gold was on the bear markets, where investors were borrowing gold and then selling the borrowed gold.
The investors would invest in dollars, which, at one stage, earned them a 6% interest rate, a very profitable transaction considering they only paid a 1,5% lease rate on the borrowed gold. When the time came to give back the borrowed gold they would sell it for a lower price, scoring again.
Such transactions forced the price of gold down.
Following September 11, which had a major impact on a US economy already in decline, thesituation changed.
The US government, in an attempt to stimulate its economy, introduced a phased drop in interest rates and, as a result, the contango between gold’s lease rates and the interest one could earn on dollar deposits diminished, making forward selling somewhat unprofitable.
The decrease in the profitability of hedging had a stabilising effect on the gold price and Harding predicts that hedging will become less and less common in the foreseeable future.
While 80% of all gold produced is consumed by the jewellery industry, the demand in this market has not altered substantially.
What has changed is the investment demand for gold.
While two to three years ago there was a negative investment in gold, this has changed, with gold now firmly in the sight of many investors.
“Gold producers are generally positive about thegold price for the future, with many looking at the economic cycles of commodities and deducing thatwe have finally moved into a bull cycle,” states Harding.
While Harding expects that gold production in South Africa will rise to over 400 t/y as a result of the changed climate, he does not believe in the return of more than 600 t/y, coming out of South Africa again.
“As most of South Africa’s reserves are deep-level one needs guarantees that the price will be stable or on the up for at least ten years, as such projects require huge infrastructural development,” explains Harding.
“Gold-miners would probably prefer to takeadvantage of the current price by developing openpit and shallow to medium-level low-cost operations,which have far shorter lead times, therefore offering more exposure to current market conditions,” he adds.
Most of South Africa’s main producers have spread their influence outside of the country so as to spread their risk, and do not place all their efforts in high-risk, deep-level projects.
“If the gold price continues to rise, we will see more and more low-cost, low-grade deposits becoming amenable.
“This could have a negative effect on the gold price, because, if worldwide production increases substantially, and the US economy stabilises, the dollar could become an attractive investment target again and the resulting oversupply in gold, together with a move in sentiment away from the metal, would drive the gold price down,” remarks Harding.