Gold Remains Generally Well Bid

Gold is maintaining a firm tone with new record highs anticipated in the short term. The yellow metal has been underpinned by solid investment and safe haven buying, as well as firm oil and a generally weak dollar.
Persistent concerns about South African supplies were highlighted once again today: Gold Fields, Africa's second largest producer of gold, reportedly may eliminate as many as 6,900 jobs from its SA work force. They plan to focus on high grade mines, while cutting production at lower quality mines. They anticipate that quarterly gold production will drop as much as 25%.

The proposed job cuts stem from the inability of Eskom, the state run utility, to provide adequate and consistent power to Gold Fields' mines. Eskom acknowledges that the power crisis is not likely to be resolved until new power plants come on-line in 2012. South Africa is the second largest producer of gold, accounting for 10% of global output.

Anglogold, South Africa's biggest gold producer, has said that they have no plans to lay off workers at this point. However, they could offer no guarantees with respect to job security. One of the means that Anglogold has used to address the crisis is to not lift ore to the surface. By stockpiling ore below ground, they save power, but this has a negative impact on global supplies as well.

South Africa also accounts for 80% of the world's platinum output, making it far and away the largest global producer. The power crisis is having even a greater impact on platinum, which is up over 40% already this year. It is anticipated that the SA power crisis will result in a 400k - 500k ounce supply shortfall this year. Some estimates of the supply deficit have been as high as 700k ounces. Platinum gained 34% last year on the back of a 265k ounce deficit. Platinum is mildly corrective today, but the outlook remains favorable. Rising platinum has had a supportive effect on gold and the rest of the precious metals complex.

Oil is maintaining a firm tone as a result of heightened geopolitical tensions in the Middle East. Turkey is engaged in a military incursion into northern Iraq that began last week. This has been a particularly ferocious cross-border assault on PKK bases and could be a protracted campaign, despite calls from Iraq for Turkey to withdraw.

The IAEA reported last week that it was still unable to determine the "full nature of Iran's nuclear programme." Iran did cooperate in other areas of the investigation, managing to put a positive spin on the agency's report as a whole. However, many questions remain as to Iran's capabilities and desires. A study by EU experts contends that Iran could have enough uranium for a bomb by the end of this year. This is much quicker than any previous estimate, including the much publicized US NIE from last year.

Israel remains fully convinced that Iran is a significant threat to the region and understandably so, given continued inflammatory rhetoric by Iranian President Mahmoud Ahmadinejad and other Iranian officials. Recent remarks by Iranian leaders were so bellicose that it warranted specific EU condemnation "in the strongest terms" as "unacceptable, damaging and uncivilised." The prospect of Israeli or US attacks on Iranian nuclear facilities have crept back onto the radar screen. These concerns are underpinning oil prices and peeking safe haven gold interest.

Serbia and Russia have rejected Albanian rule in Kosovo amid continued protests and violence in the Balkans. The US has already recognized Kosovo independence. The EU remains split on the issue, despite favorable reactions by France, Germany and the UK. These tensions on the European continent are also contributing to safe haven gold buying.

The dollar is maintaining a defensive tone with the dollar index trading below 76.00. Scope remains for short term probes below 75.00, which would bode well for a retest of the all-time low at 74.48 and a resumption of the dominant downtrend. A weaker dollar increases the appeal of gold as an alternative investment and makes gold cheaper and therefore more attractive to holders of foreign currencies.