Author: Brian Kantor

The member companies of the Chamber did much better in extracting gold bearing ore from their mines than in extracting gold as the second table shows. The tonnes of gold-bearing rock they milled actually increased in recent years. What has declined precipitously is the average amount of gold contained in each tonne of ore raised to the surface. Each tonne of rock extracted, expensively and dangerously, from the bowels of the earth now contain a miniscule average 2.9 grams per metric tonne. The loss of SA’s share in global mine production has much more to do with declining grades (from 4.56 grams per tonne in 2003) than it has to do with increased output elsewhere. Global gold output has increased by approximately 230 tones since 2003, while production from all SA mines fell by 208.6 tonnes over the same period. In other words, production outside SA has increased by a little more than SA production has declined.

An important further point worth making is that annual production of gold is a very small proportion of the gold ever produced. Almost all of this has survived and is held as a store of wealth. Therefore, as is surely apparent, the price of gold is little affected by current output – legal or illegal. The legitimate mines may lose potential output to thieves and the SA government is not able to collect income from illegal or informal miners, while the price is unaffected by illegal mining activity – equivalent to 5% to 10% of the legal production. Furthermore, if the gold has been extracted illegally from shafts that have been permanently abandoned, such output is incremental, not lost. The gold would have stayed in the ground and not helped produce any income at all. The costs of mining this otherwise abandoned gold is borne entirely by the workers themselves, including the risks of losing their lives to rock falls and their gold to gangsters preying on them.

Incidentally, the gold produced in SA in 2012 earned R73bn, well up from the R32.9bn realised in 2003 thanks to the higher rand gold price. 5% – 10% of this attributed to illegal gold miners is significantly more than the R2bn worth of illegal mining revenues reported by the WSJ and does not take account of other mining sales that altogether totaled R363.8bn in 2012. Such illegal mining activity, currently largely unrecorded, could add significantly to the SA GDP were it to be included in the national income accounts.

Yet while the recorded output of gold has declined and the numbers employed in gold mining has fallen from 198 465 employees in 2003 to 142 201 in 2012, average earnings of these workers have improved significantly over the same period. Total gold mining earnings amounted to R22.24bn in 2012 or R156 386 per employee, compared to approximately R63 900 earned by the average worker in 2003, or to R103 000 in 2012 (the equivalent when adjusted for CPI). In other words, the average employee in the gold mining industry, of whom there are now fewer, appears to be earning about 48% more in CPI adjusted terms in 2012 than they did in 2003.

These improved remuneration and employment trends are unlikely to be independent. The fewer surviving gold mine workers have become more productive, helped no doubt by more and better equipment per worker, judged by the volume of ore extracted rather than the gold produced. The industry would not have survived otherwise than by providing fewer jobs in exchange for what have become better paid and more productive workers. Operating margins for the Chamber member mines have improved rather than deteriorated over the years, as we show below, despite lower grades of gold mining ore.

The safety record of the industry, judged by fatality rates, has also improved as we show below. Thus the industry has provided better and safer jobs, but for regrettably fewer workers.

As the WSJ makes only too clear, the willingness of the illegal miners to undertake the hazardous and poorly remunerated work they engage in has much to do with the lack of alternative employment opportunities. To quote the article again:

”’If I could find a proper job, I would leave this,’” says Albert Khoza, 27, who says he started illegal prospecting eight years ago because he couldn’t find work and was desperate to send money to his family. On this day, outside an old mine about 60 miles from where Mr. Matjila mines, he has been handling mercury with his bare hands. His eyes are bloodshot and infected, as he stokes the fire with plastic containers”.

Or, as the other illegal miner interviewed, Mr. Matjila, is reported to have said: “’We’re not criminals, I don’t want to be doing this. But I need to make some money.’ Then he stood up to walk down the road to the hardware store to check on prices of new supplies. ‘We have to make a plan to find another hammer,’ he says.

The challenge to the SA economy is to resolve the inevitable trade-offs between better jobs for some workers and the very poor alternatives then open to those who are unable to gain access to what is described as ”decent jobs”. The formal SA labour market has not been allowed to match the supply of and demand for labour at anything like market-clearing employment benefits. And so we have the insiders, those with formal employment and willing to launch strike action to further improve their conditions of employment; and the outsiders who find it so difficult to gain entry to formal employment, of whom the illegal miners represent a numerically important group, as numerous, so we are told, as those formally employed in gold mining.

The solution to the general lack of formal employment opportunities appears as far away as ever. Strike action not only leads to higher real wages and reduced employment opportunities, but still greater incentives to substitute reliable machinery for more expensive and unreliable labour that makes continuous production very difficult to achieve. The unpredictable impact of strikes on production is perhaps as much an incentive to reduce complements of relatively unskilled workers as are higher real costs of their employment.

To encourage employment in the gold mining industry and everywhere else, it would be very helpful if workers were willing to share in the risks of production, as the illegal miners appear willing to do: that is to accept less by way of guaranteed pay and more by way of rewards linked to performance and profits. In other words, for workers to become, to a greater degree, owners of the enterprises they engage with. If pay went up and down with the gold price, the gold mining industry would surely be willing to bear the risks of hiring more workers.

The slow but more or less steady recovery of the US economy allowed the Fed to suggest in May 2013 that it would be tapering such injections of cash into the system and that by late 2014 it would hope to end QE. It has since followed through on this prospect. Monthly net purchases of these securities in the market have been tapered and the security purchase programme will be over soon. This announcement of a likely end to the Fed support of the fixed interest market led however to the “taper tantrum” of May 2013. Long bond yields rose significantly and equity values declined. Volatility, in the form of daily moves in equity markets, increased and emerging equity and bond markets – regarded as more risky than developed markets – were particularly affected.

Then, despite the Fed taper in 2014, the trend in long term interest rates reversed direction, markets calmed down and share markets recovered. Indeed, market volatilities as measured by the Volatility Index, the VIX (the so-called “fear index”), had fallen back to pre financial crisis levels by mid 2014 and the US equity markets has moved back to record high levels.

The danger of the VIX at such low levels was that volatility could spike higher and share markets accordingly retreat (given that they were regarded by many observers as, at worst, fairly valued by the standards of the past, as represented by conventional Price/earnings multiples).

It could be demonstrated by reference to past episodes of low volatility and demanding valuations that such a combination of low volatility and generously valued equities would need more than good earnings growth to provide good returns. In the past it appeared that only lower long term interest could overcome well valued equities and low volatility. Moreover, it was widely assumed that long term interest rates in the US, very low by the standards of the past, could only be expected to increase. The upwardly sloping US treasury yield curve indicated very clearly such expectations of higher interest rates to come and incidentally still does so.

To the surprise of the bond market and despite the Fed taper, long term interest rates in the US fell rather than rose in July and August 2014. It was lower interest rates in Europe, especially in Germany, that led global rates lower in July. Not only did German Bund yields fall, with US and other rates falling in sympathy, but the spread between lower European and US rates actually widened, surely adding to the appeal of US Treasuries. The Spanish government now pays less for 10 year money than Uncle Sam.

The Fed therefore is no longer the lead steer of the bond market herd. The danger of deflation in Europe is that it leads interest rates lower. And this deflation is all the more likely given quantitative tightening in Europe to date, rather than easing. Unlike the Fed or the Bank of Japan, the assets and liabilities of the ECB have been falling significantly rather than increasing. That the supply of European bank credit and broader measures of money has been falling is consistent with a lack of demand for ECB deposits.

These broad trends will have to be reversed if European deflation is to be avoided. The ECB will have to do what it takes to increase the supply of money and bank credit. QE action is called for and can be expected to continue to hold down global bond yields. Euro deflation trumps the risk of higher interest rates.

The figures below fully illustrate this story of falling interest rates, declining volatilities and higher share prices. We also show how the US dollar has strengthened in response to this improved spread in favour of the US and how developed and emerging equity markets (including the JSE) when are running together, when measured in US dollar terms.