Precious Metals are Closing Mines, Creating an Opportunity for Traders – Introduction
The first topic taught in an Economics class is on demand and supply. The theory of supply and demand says that as the supply of a product increases, its price tends to fall. As the demand rises, its price tends to move up. This is a situation that is going on in the world of precious metals.
Precious metals like gold, platinum, and palladium are all located deep inside the earth’s crust. Many decades ago, some of their deposits were found on the surface. It was not uncommon for a person walking along river banks to find exposed precious metals.
As the demand increased, all the freely available metals disappeared. Miners then started digging deep to find the metals. As they dug deeper, so did the price of the metals rise. It rose because the companies had to sell the metals at a higher price to recoup their investments. For gold, the demand came from governments as the role of gold as a currency reserve increased.
These commodities are found in many countries. However, South Africa is one of the leading gold producers in the world. For decades, it was the dominant producer of the metal, though other countries such as China have emerged as top competitors. South Africa and Zimbabwe are also key producers of platinum and palladium.
In recent years, the concern has been that the mines in the country have turned out to be unprofitable. This has been caused by three main factors. First, the price of gold and other metals has fallen significantly. Second, the workers of the mines have demanded higher wages, which has led to lower margins for the companies. These workers are usually unionised and under collective bargaining agreements (CBA). This means that a company that workers can strike for months, not work, and yet demand the salary for the month.
Last week, a South African firm announced that it will layoff 13,000 platinum miners. In November last year, another company in the country announced that it would fire 2000 miners, and mid this year, Anglo-Gold announced that it would lay off 2000 employees. In total, more than 100K mining jobs in the country are now at risk.
These layoffs will lead to low production of gold and other precious metals. In addition, the problems are not in South Africa alone. In all major mining countries like Chile and Australia, the number of layoffs has increased. Australia is in the process of diversifying its economy from mining to other sectors like technology and retail.
The problems with the precious metals has increased with the stronger dollar. Since all these metals are quoted in dollars, a stronger dollar has led to a decline in their pricing. The chart below shows the YTD trends on the dollar index in relation to that of other precious metals.
As you can see, there is a close relationship between the stronger dollar and the price of the precious metals. This is an indication that the effect of mine closures has not yet been priced in by metal traders. Therefore, as the dollar starts to move lower, these metals are likely to see major upward movements.