The rand continued on a firm note during the quarter to end of September 2009, appreciating by 3% to R7,51/US$. This had the effect of diluting a strong US dollar gold price, which rose from US$940/oz to US$1 000/oz during the three months. In effect, the South African producers saw their average received gold price for the quarter coming down to R240 000/kg, compared to R250 000/kg in the previous period. Gold traded range bound for most of the quarter, bouncing between US$900/oz and US$960/oz, before springing up to the US$980/oz to the US$1 010/oz range in September. The jump seemed to have caught many by surprise as there was little movement in Exchange Traded Funds (ETFs), and speculative positions were already at historical peak levels.

However, Barrick Gold announced that it would close out all its hedges and join the ranks of companies that have full exposure to the spot price. Nevertheless, Barrick would have bought the gold it needed before making the announcement. AngloGold Ashanti (ANG) remains the only gold major with a hedge book, the size of which is four million ounces, a year's production. Anglo's strategy is to spread the hedges over the next couple of years in such a manner that will achieve a 6% discount to spot prices. There probably will be opportunistic close-outs.

South African gold shares rose 6%, as measured by the movement of the FTSE JSE Gold Index. The leader amongst the majors was Gold Fields (GFI), with a 7% performance, followed by ANG (5%) and Harmony Gold (HAR) (0%). Harmony advised the market that at the current market prices, their Virginia operations are bleeding cash and up for closure consideration. Operational performance on the other mines was satisfactory but margins were under pressure due to the stronger currency. Gold Fields also came out with an update for the quarter, reporting that costs (although up mainly due to the rand) and production were as planned.

The quarter to June was all about the rand. The local currency appreciated by 17% against the US dollar, from R9,35/$ to R7,72/$, supported by diminished risk aversion. The greenback lost 6% against the euro during the quarter, which should have been positive for gold. However, increased optimism put a cap on any gold price rally, with the yellow metal managing to rise less than 2% during the quarter. In the instance that other financial instruments rise, gold becomes less attractive as an investment. Volumes into Exchange Traded Funds (ETFs) were less than 1.5 million ounces this quarter, compared to the nearly 15 million ounces witnessed during the first quarter of the year.

The strength in the currency ensured that the rand gold price fell by a similar rate, 17%, from R281 000/kg to R233 000/kg. The consequence of the fall in the rand gold price was that the Gold Index fell almost 20%. The second quarter of the year turned out to be a better quarter for Gold Fields and Harmony, as both guided for higher production. However, the benefits from this growth in output will be whittled away by the strong rand. Harmony has warned that if the rand gold price was to fall below R225 000/kg it would have to alter its operations significantly (i.e. turn to high grading), and possibly consider retrenchments.

Although the rand gold price started the year at a blistering pace, reaching a record R318 000/kg, it soon petered out to end the quarter at R281 000/kg. At the time of writing, the yellow metal was sitting at R265 000/kg, an almost 20% fall from its peak. The movement in the rand gold price was, of course, influenced by the path followed by the dollar gold price and the rand exchange rate. The dollar gold price rose 6% during the three months in review, from $872/oz to $922/oz (currently trading below $905/oz).

Gold benefited from safe-haven buying, which pushed it up to a quarter high of $987/oz. We saw volumes in exchange traded funds (ETFs) rise 35%, or 13.3 million ounces, and stories of shortages of bars and coins continued to circulate. However, the high prices attracted scrap material and choked off jewellery demand. In India, normally a mainstay for gold demand, it was reported that imports were cut down to a trickle (if at all existent) while scrapping increased to the point where refineries could no longer cope. What happened here (and any other market outside of the USA) was that gold reached very high levels in local currency terms as the US dollar also strengthened during the same time.

In South Africa, the rand weakened from R9.47/$ to R10.43/$ before regaining lost ground to end the quarter at R9.57/$. After the close of the quarter the rand continued to strengthen. A strong rand does not bode well for the gold mining sector, especially when the dollar gold price is falling as well. Consequently, the FTSE/JSE Gold Index has experienced a rather dramatic fall ending the quarter down 22.8%.

The high rand gold price had carried the gold shares up, with AngloGold Ashanti (ANG) leading the majors by turning in a performance of 34% during the quarter, followed by Gold Fields (GFI) [+15%] and Harmony (HAR) was marginally down [-1%]. Our bet on the leverage plays did not pay off during the quarter as the fund underperformed the benchmark.
Notwithstanding the performance of the gold sector, the platinum group metals (PGM) sector confounded the sceptics. Firstly, platinum recovered from its 2008 lows of $795/oz to reach $1.130/oz by the end of the first quarter of 2009. It benefited from safe-haven buying which overflowed from gold and also (it would seem) its ratio to the gold price was considered too low to stay there. The outperformance of platinum pulled the shares along with it, and the sector was up 9.6% (30.6% in the month of March). We remain confounded by platinum's behaviour given that the situation is unlikely to improve in the auto sector (the major source of demand), the stimulus packages notwithstanding.

Precious metals capped a rather tumultuous 2008 with a recovery during the fourth quarter. Rhodium led the charge with a 25% recovery from its lowest point of the year ($1 000/oz) to end the year at $1 250/oz. Gold was close, recovering 23% from the year's low point of $702/oz to reach $867/oz by year-end. Platinum rose 18% while palladium was up 11% from their respective low points to end the year at $898/oz and $183/oz, respectively. However, annual performance of the precious metals complex was dismal, with platinum group metals (PGMs) more than halving, while gold only managed a 3% gain during the course of the year. Prices for PGMs were mainly impacted by falling demand for cars around the world, as they are used for auto-catalysts in the exhaust systems of vehicles. Gold was weighed down by deleveraging that became prominent in the fourth quarter of the year. However, there was anecdotal evidence that demand for physical gold was very strong during this period. Notwithstanding these factors, the rand gold price was up 41% for the year, and it reached a new all-time record of R277 000/kg. Disappointingly, the strong rand gold price was not entirely reflected by the performance of the gold shares. The FTSE/JSE Gold Index was actually down 4%. Anglogold Ashanti (ANG) was the worst performer with a -15% return, while Gold Fields (GFI) was down 9%. Only Harmony (HAR) followed the rand gold price up, with a return of 39% for the year. The companies have done a lot this year in a bid to restore their earnings leverage to the gold price. ANG closed out most of the 2008 and 2009 hedges. GFI refocused its efforts on safety by rehabilitating part of the Kloof shaft and also withdrawing from some of the marginal areas at Driefontein. HAR's focus was on restoring mining discipline, disposing of marginal and non-core assets and strengthening the balance sheet. The fund ended the year with a combined 40% holding in GFI and HAR, and under 5% in ANG. Platinum exposure was through Northam and Mvela Resources, two shares that are bound to benefit from M&A activity within the sector. The outlook for 2009 for the gold sector is dependent on the depth of the recession. If most of the world's economies enter a deflationary period, then there will be little impetus for gold to rise. However, if inflation does begin to rise, gold could break more records from here.