What South Africa's Mining Turmoil Means for Investing in Gold

Gold prices recently have risen due to global central bank stimulus measures, but the true movement in the market stems from much more than QE3.

Precious metals investors no doubt have seen the recent headlines coming out of South Africa. Violent strikes (resulting in dozens of deaths) and work stoppages have plagued the platinum industry there in the past few months.

The causes of the labor unrest include poor wages and unsafe working conditions. There has also been a tussle for power between two warring labor unions - the Nation Union of Mineworkers and the far more militant Association of Mineworkers and Construction Union.

The result of all this turmoil is quite obvious for the global platinum market. The majority of the world's platinum, roughly 80%, comes from South Africa. Not to mention that 90% of that production comes from a limited area, the Western Bushveld region of the country.

But here's where it gets interesting, especially for those investing in gold.

South Africa's Gold Market History

The labor unrest in South Africa has spread outside of the platinum industry, affecting most mining activity in the country, including gold.

Despite its tumble from being the world's largest producer of gold, South Africa was still the world's No. 5 gold producer in 2011. Its output was 190 metric tons last year.

In addition, the country still has the world's second largest in-ground gold reserves at 6,000 metric tons of the yellow metal, according to the U.S. Geological Survey.

So the events in South Africa can't help but have a long-term impact on the gold market.

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So far, the so-called illegal or wildcat strikes at South African gold mines have not been excessively violent. But the demands for increased wages, to $1,514 a month, and better working conditions are similar to those that the platinum miners made.

Strikes are occurring at several major South African gold mining companies including Gold Fields Ltd. (NYSE ADR: GFI) and AngloGold Ashanti Ltd. (NYSE ADR: AU). AngloGold is the world's third-biggest gold producer by volume. So it should have opened some eyes in the gold market when the company announced in late September that it was shutting down operations at its South African gold mines.

The interesting thing here is that the workers are not listening to the leaders in their union, who are cozy with the gold companies, and are taking these actions without the blessing of their leadership.

The miners, among the highest paid workers in South Africa, do have a point. They work in some of the most dangerous conditions in today's mining industry.

That's because the region's gold is found at such deep depths, which is the main reason behind South Africa's decline as a gold producer. Gold-mining firms there have had to go deeper than before to find gold in the ground, making mines more dangerous. It also makes them more costly to operate, shrinking profit margins.

In addition to rising labor costs, companies have also had to pay much more for critical power (when it's available) needs. Electricity costs in the country have jumped an average of 25% over the past three years.

South Africa and Gold Prices

So what are the implications for investors?

Obviously, the first one is that what is occurring in South Africa is terrible for the companies trying to conduct mining business there.

South Africa, for example, accounts for about a third of AngloGold Ashanti's gold output. Speaking to the South African media, its CEO Mark Cutifani said the South African gold mining industry was on a "knife edge".

It seems as if the traditional labor dispute resolution mechanisms are breaking down in the country. Some have even said that conditions facing mining firms in South Africa are the worst since the end of apartheid in 1994.

David Davis, an analyst at SBG Securities, told the Financial Times that the gold mining industry [in South Africa] was "fast reaching an impasse." He went on to say the rash of illegal strikes "will likely engulf the industry".

The South Africa gold-mining companies are damned if they do and damned if they don't with regard to workers' demands. If they don't give in, mines are shut down due to strike action. If they do give in, many mines will be closed because they will simply no longer be profitable.

Bottom line here for investors is that gold production from South Africa, the fifth-largest producer, will likely be sharply curtailed for many years to come, perhaps permanently. This supply disruption will only add to the already bullish climate for gold thanks to monetary easing around the globe by central banks.

This bodes well for gold long term, in whatever form investors choose - physical gold bullion or any of a number of gold ETFs including SPDR Gold Shares (NYSE: GLD) and the ETF Securities Physical Swiss Gold Shares (NYSE: SGOL).

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