Years of underinvestment by gold mining companies have created a looming vacuum in supply as the new Sharia Standard kicks in, says the head of one of the largest producers, Africa-focused Randgold Resources.
“A complete lack of investment in exploration means we are headed towards a supply cliff,” said Mark Bristow, the chief executive of the UK-based mining firm, in reaction to the announcement of a Sharia standard for the precious metal. Randgold is the largest gold producer listed in London with a market value of about US$7.7 billion.
The company operates five gold mines in three African countries – Mali, Ivory Coast and the Democratic Republic of Congo, where it operates the Kibali mine.
It is also one of the very few gold producers to have survived the mining downturn relatively unscathed.
During the gold “supercycle” that began in 2005 and lasted until about 2011 the price rose more than three times from an average of US$513 per ounce to $1,664. Mining companies responded with a frenzy of investment, mergers and acquisitions. When the price run finally gave out many struggled to adapt and began cutting costs that included axing exploring for new gold.
“Any new addition to demand will drive up price, as we saw with the Chinese led supercycle back in 2005,” Mr Bristow said. If the prediction of UK-based gold trader GoldCore that another 500 to 1,000 tonnes of the precious metal will be needed is accurate, the pressure will be on producers.
Spot gold was at $1,214.1 at 5.50pm UAE time on Wednesday.
Today it takes at least five years to go from mapping a gold deposit to turning into a mine. Investors willing to risk the billions of dollars it can cost need to be found, and they must be prepared to wait years before seeing a return. Moreover, most new mines are being built or planned in remote locations.
To feed the continuing need for cash, mining companies frequently issue shares. This dilutes the stock and causes wild fluctuations in share prices. This turns them into a speculatively traded stock rather than a long-term investment, something that Sharia investment forbids.
“We’ve kept a very stable share register,” says Mr Bristow. “We’ve been very careful about issuing shares and made it clear that the business is about creating value and being profitable. We’ve managed our investors as owners rather than traders.”
Developing countries are where most of the new investment in mining capacity will go should a renewed interest in new mining ventures result from increased gold demand from Sharia investors.
“Emerging markets stand to benefit as this is where it is possible to build,” Mr Bristow says. However this brings with it additional costs as often mines must also build basic infrastructure. At Randgold’s Kibali operation in north-east Democratic Republic of Congo, for instance, the company has had to construct hydrodams to supply power for the site.
Overall though, Mr Bristow is confident the gold price is heading in the right direction. “What we are seeing now without a doubt is gold rocketing against the pound after Brexit. The role of gold is also becoming more important in a climate of global political uncertainty, which is now enhanced by the surprise victory of Trump.”
Bloomberg reports that investors have already begun shifting into haven assets following US president Donald Trump’s inauguration, with treasuries and gold rising after a fiery inauguration speech that promised to upend the political establishment. With more political upsets anticipated in Europe as more countries go to the polls, nervous investors are drawn to physical assets.
“Throw in wars, ISIL, this market will adjust in a very dynamic way,” Mr Bristow adds.
Gold was trading up 0.1 per cent at $1,214 in late afternoon trading on Thursday.
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