High South African Gold Production Costs Sting Mining Firms

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In its December Quarterly Bulletin, the South African Reserve Bank (SARB) reported that South African gold production costs are among the highest in the world.

The SARB published, "Gold mining was adversely affected by the continued increase in input costs, with South Africa's gold production costs among the highest in the world."

The high cost of South African gold production was said to have "an adverse affect on gold mining in the third quarter of 2007."

However, overall South African mining output (both gold and non-gold) strengthened during the third quarter after contracting in both the first and second quarters. (Read more about the decline of South African gold production in 2006 )

Subsequent to an annualized decline of 3% in the second quarter, real output of the mining sector increased at an annualized rate of 4% in the third, thereby contributing a quarter of a percentage point to quarterly South African GDP growth, the SARB said.

The reserve bank attributed the turnaround to an improvement in non-gold mining, particularly to the production of diamonds and platinum. Platinum and platinum group metals benefited from strong commodity prices and the increased demand for emission control catalysts and jewelry.

Mining Accounts for 14.6% of New Jobs in South Africa

The SARB reported that both gold and non-gold mining contributed to significant job creation during 2Q 2007.

While total employment growth in the non-agricultural sector slowed to 2.6% in the second quarter from 4% in the first quarter, employment across the mining industry grew by 6.4% during 2Q.

Jobs in the non-gold sector jumped 8.2% while those in gold mining rose by 2.9% during the second quarter of the year.

The mining industry as a whole added 34,651 jobs from the second quarter of 2006 to the second quarter of 2007. This means that the mining industry accounted for 14.6% of the 237,624 new jobs created across all sectors over the same period.

Overall, the SARB says that the South African economy continued to grow in the third quarter of 2007. Growth in real gross domestic product accelerated from an annualized rate of 4.5% in the second quarter of 2007 to 4.75% in the third quarter. This was the result of stronger growth in the real output of both the primary and tertiary sectors.

The high costs of South African gold production will likely be passed on to the consumer and will have a positive upside effect to gold prices in the long-run. This is yet another factor that will lead to +$1,000 gold in the next few months.

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