METAL MARKETS South Africa`s effect on metal prices

The most important single item of news to be found in the bruising events flowing from the panic on world stock exchanges from Oct 19 on is that the gold price retained its value (while stocks did not), and it even went up a few dollars an ounce, as did silver, platinum and palladium. Those who held gold lost nothing.

Many advisers in the U.S. and Canada knowledgeable about gold have been urging clients for years to keep about 25% of their portfolios in a mix of the four major precious metals. Those who did are now smiling like Cheshire cats. Such investors are true friends and supporters of the mining and exploration industries.

Meanwhile, it appears at least $1 trillion has suddenly been removed from the spending power of investors in the U.S. alone. It also suggests a downturn in the industrial economy in the U.S. and possibly elsewhere within nine months or a year as consumers buy less, which would not be good for copper and world base metal and platinum and palladium prices.

This column is a second look at how metal prices are made. Before examining next month other major factors (the Gulf crisis, Soviet grain harvests, etc.) in the why and how of world metal price discovery, let us get inside of one important influence on metal prices, South Africa, and its possible future effects. Labor unrest

Professional traders were not surprised that strikes there this year by black miners did not materially affect gold and other metal prices, as it was felt the authorities would remain in full control. However, any appreciable worsening of such situations over longer periods of time could help push metal prices up.

The slowly deteriorating political situation in South Africa produces anxiety and nervousness in the West over both the civil and mining situations, even though tension ebbs and flows. Big money has been systematically flowing from South African investments to the U.S. The declaration of a state of emergency last June brought a security clampdown. In 1986, the U.S., Canada and a reluctant U.K. initiated rather mild sanctions, now judged ineffective, against the republic even though the U.S. does not allow imports of South African uranium, iron, military equipment, etc.

Further economic sanctions are now threatened (excluding the U.K.), compounded by Western fears of export restrictions on strategic metals by the republic which would definitely lead to some higher world metal prices, to the distinct advantage of certain Canadian mining companies and others. The anti-apartheid feeling in the U.S. congress will keep the issue up front in the 1988 presidential election year. Mining economy

South Africa is an important mining country; it is the world’s largest mine producer of gold, platinum, gem diamonds and vanadium, and a sizeable producer of copper, uranium, iron, etc. Gold alone accounts for more than half of South Africa’s $22 billion(US) foreign earnings. In the last two years, the gold price has risen from $280 to the $460 range, greatly helping out that country’s economy.

So, what would happen if things went further and there was a successful uprising and a revolutionary government (in a military coup?) took over? You can be sure of one thing: the new regime, of whatever hue, would want to continue as much mine output as possible, particularly gold, copper, diamonds and platinum, in order to provide a viable economy, necessary to enable it to finance and execute its program.

The periods preceding and following such a takeover would probably include some violence and mine damage and sabotage (in spite of the nation’s good, but thinly manned, defences), so metal production over-all might have fallen. Further, some operating inefficiency would prevail, as it has in most other newly independent countries, following nationalization. Fortunately, many African nations are partly reversing this situation.

All this dislocation would lead to much stronger world prices for precious and some base metals.

T. P. (Tom) Mohide, a former president of the Winnipeg Commodity Exchange, served as director of mineral resources with the Ontario Ministry of Natural Resources prior to his retirement in 1986.