Gold Prices & South Africa's Energy Crisis

The power outage now hitting South Africa could support platinum & Gold Prices for 12 months or more...

IT'S NOT EASY being green, especially if you like Gold Bullion.

   Mining gold is a dirty, chemical-heavy business. It's also energy intensive as the current shutdown to production in South Africa – the world's No.2 producer – shows.

   Outages along the country's creaking power grid have shut down gold and platinum production. To stave off a crisis, South African officials have reduced electricity exports and rationed power, but freely admit that there's no foreseeable end to the shortages.

   Mining operations account for about 15% of South Africa's total electricity demand – and every day without power costs the country's mining industry an estimated US$27 million. GoldFields, a large Johannesburg-based miner, says its South African operations alone account for about 7,000 ounces of gold production a day, equivalent to $6.4 million.

   Impala Platinum says it's losing about 3,500 ounces of platinum a day, worth $5.9 million.

   Earlier this week a task force including representatives of South African power company Eskom, mining companies, labor unions and the government have vowed to restore 70% of the mines' normal power needs immediately. That level was sufficient for essential maintenance and servicing, but not for full production.

   So now another industry-wide meeting has agreed to restore the power supply to about 90% of normal, which would enable full production to resume at the weekend.

   Wags are now punning madly about how South Africa has lost its spark. There's no doubt, however, that the power outage has sparked a rally in both platinum and Gold Prices, sending both to new record highs.

   Indeed, the platinum market is now inverted – with longer-dated futures trading below near-term delivery – reflecting investors' expectation of genuine physical shortages.

   This is a wrinkle that even the buggiest of gold bugs – and their platinum-coated cousins – never anticipated. But fragility in the South African infrastructure isn't likely to be remedied soon, so this will be an ongoing issue.

   It's bound to lend support to the precious metals markets over the coming year.