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Platinum producers such as Lonmin who owns Marikana have had to deal with a low platinum prices and rising labor costs as platinum is $100 below the price of gold.

27 Oct 2012

By Jeb Handwerger
We are seeing some healthy profit taking in gold (GLD) and silver (SLV) after making an explosive breakout over the summer. Investment demand after QE3 is increasing as investors seek alternatives to fiat currencies which are being devalued by Central Banks all over the world.

We may see consolidation and volatility in the markets until after the U.S. Presidential Election, when most investors realize that not much will change. All over the world governments are looking to boost unhealthy economies and this will continue regardless of who is in office.

Major infrastructure projects will probably be announced after the election both in the U.S. and China to boost employment. Additional means to boost the velocity of money and encourage risk on investments will be promoted by punishing hoarders of cash and treasuries.

In addition, we have serious supply concerns as the majors delay large mines and South Africa one of the largest producers of gold, platinum (PTM) and palladium (PALL) is facing the worst and most violent labor crisis in decades. This will not end quickly and may continue to plague the South African mining industry. This will not only put pressure on the supply of gold, but could cause platinum to spike as more than 80% of the world's supply originates from this questionable jurisdiction.
A Recent CBSMarketwatch interview where I was quoted stated:

"…Jeb Handwerger, a natural-resource analyst and editor of GoldStockTrades.com, said that reduced supply from South Africa, combined with rising investment demand from emerging markets, could spur platinum prices to outpace gold.

"Platinum is still 20% below pre-credit-crisis highs, while gold and silver are approximately 80% higher," he said. "This deviation from historical means will not last forever….Meanwhile, gold output in South Africa is a worry too. As of mid-October, strikes among Africa's largest gold producers have cut the nation's gold production by half, according to Bloomberg."

We stated for many years that investing in South Africa may be a risky proposal and it was no longer a mining friendly jurisdiction. Over the summer we initiated coverage on two North American platinum and palladium as we believed the tumultuous situation in South Africa with violence would escalate and platinum/palladium prices would breakout. Since the strike gold jumped from $1600 to $1800 and platinum jumped from around $1400 to $1700. Now it has pulled back to strong support.

In August the Marikana Miners walked off the job to protest low wages and poor working conditions. Over 36 strikers were killed. This was the most violent clash with police since the early 60′s.

The strikes have spread all across South Africa. Many major gold and platinum companies were already dealing with lower production and higher costs. This turmoil is already putting more pressure on the supply side of platinum and increasing demands coming from the growth of the auto industry in emerging nations.

Platinum producers such as Lonmin who owns Marikana have had to deal with a low platinum prices and rising labor costs as platinum is $100 below the price of gold. Before the credit crisis platinum was more than double the price of gold. Since that time, the South African strikes are continuing to be a major thorn in the side of the South African miners such as Anglogold Ashanti (AU), Gold Fields (GFI), Harmony (HMY), Impala (IMPUY) and many more.

The workers have refused pay raises and it does not appear that the strikes will be ending anytime soon. Do not forget that working conditions in South Africa are much more challenging than other regions as miners descend to much greater depths underground where ventilation is a major concern.
Remember in 2007, over 3000 workers were trapped underground. This led to some mines being shut down including one of the nations largest gold mines. South Africa used to represent over one third of gold production in the early nineties, now it is probably close to a tenth.


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