Monday, February 25, 2008

South African Electricity Regulation-Another Cause Of High Gold Prices

The main reason of the dramatic recent surge in the price of gold and other commodities is the one I mentioned in the previous post-namely the inflationary policies of the Fed.

There are however other factors at work here. In the case of gold that means regulation of the price of electricity in one of the biggest producers of gold-South Africa. Compared to the nightmare of Zimbabwe, South Africa is relatively well-run. However, that says a lot more about Zimbabwe than about South Africa. The South African government has pursued many disastrous policies, including an inability to deal with the extremely high violent crime rate, affirmative action policies and price regulations in many areas-including electricity.

The South African government regulates the price of electricity and holds it down at very low levels compared to most other countries. As tends to be the case in all price ceilings, this have deterred or disabled both private investors and the government-owned power company Eskom from expanding capacity, something which is now causing massive shortages.

This massive electricity shortage in South Africa is now forcing many gold mining companies to reduce their output. This will help raise the gold price for as long as this power crisis continues. If and when it goes away, this temporary effect will go away, but it will during 2008 provide further support for the price of gold.


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