JOHANNESBURG, South Africa -- This city was literally built on gold, atop a 300-mile-long vein discovered more than a century ago that still makes this country the world's leading producer of the precious metal.

The high veld surrounding Johannesburg is dotted with hills of the yellow waste produced by decades of mining, and the main highway south is bordered with the skeletal towers of mine shafts that run as deep as 3 miles in search of the rich ore.

Little wonder, then, that when some of the world's canniest money men -- the central bankers -- decide that gold is not the best investment to keep in their vaults, there is dismay in this land.

Gold is simply not what it was.

In London tomorrow, the Bank of England will join what could be a new gold rush -- albeit away from the stuff -- by auctioning 25 tons of the metal.

It is the first of five bullion auctions planned this financial year by the bank, which has decided it would prefer to have more of its reserves in paper money than precious metal.

The Bank of England wants to reduce its gold holdings by more than half, from 715 tons to 300 tons "in the medium term," and has indicated it will organize future bullion auctions "to achieve a better balance in the portfolio by increasing the proportion held in currency."

Earlier, limited sales by central banks of various countries, including the United States, Canada, Belgium and Holland, helped tarnish the image of gold, which has been losing its attraction as an investment for years. Even the South African Reserve Bank has cut its gold holdings from 66 percent of foreign reserves in 1992 to 19.2 percent last year.

Other central banks, and even the International Monetary Fund, are considering joining the sell-off, as their gold holdings lose their glitter due to declining demand and increasing availability.

It is quite a setback for the metal that was the standard for the international payments system from 1920 to 1944, was held at a fixed value of $35 an ounce from 1944 to 1971 under the Bretton Woods system, and has always been the favored under-the-mattress savings of canny peasants around the world.

Gold is selling at a 20-year low of about $260 an ounce, down from $288 when the Bank of England announced its auctions in May, scuttling any hope that it was on its way to the $300-an-ounce benchmark.

At the cost of jobs

The drop in price has inevitably had its worst impact here in South Africa, which at its peak in the 1960s and 1970s was producing more than 70 percent of the world's gold. Last year, South Africa produced 19 percent of all newly mined gold, and still has more than a third of known global reserves, according to the World Gold Council.

The impact was also heavily felt in the neighboring countries of Lesotho, Mozambique, Swaziland and Botswana. They supply half of South Africa's gold-mining labor force, and each gold miner is estimated to support seven to 10 dependents.

Employment in the gold mines here fell from 330,000 in 1994 to 257,000 last year, but the indirect impact on jobs was also heavy: For every three miners, another worker is employed in an industry serving the mines, according to the World Gold Council.

Last week, five mining houses, blaming the collapse of the gold market, signaled plans to lay off 8,000 miners, bringing protests from the National Union of Mineworkers (NUM).

"We don't believe these people are as poor as they are telling us," said union spokesman George Molebatsi. "We think they are still making money. Ostensibly we are being told it's the gold price that forces these decisions. We don't believe that is true."

Molebatsi believes the mines are trying to offset the cost of new employment and safety standards by cutting payrolls. The union is demanding an 18 percent pay increase this year. The mining houses are offering between 8 percent and 9 percent -- barely above the 7.5 percent inflation rate.

"It could be we are incurable optimists," said Molebatsi. "But we don't think the price will go further down than it is. I think it has hit the bottom, and the only way for it now is to go up."

If he is wrong and the price continues to drop, the consequences could be dire.

In a display of shared concern, NUM President James Motlatsi and Bobby Godsell, chief executive of the country's largest gold company, Anglogold, traveled to Washington last month to lobby Congress to block the proposed IMF gold sales. Motlatsi warned that 40 percent of South Africa's mines are threatened by low gold prices, putting 82,000 jobs at risk.

The South African economy has lost more than 500,000 jobs since majority rule was achieved in 1994, pushing unemployment toward the 40 percent mark. Thabo Mbeki, elected president in May, was forced to make job creation a top priority.

It will not be easy.

Economic shrinkage

Every $10 drop in the price of an ounce of gold produces a 0.15 percent shrinkage in the growth of the country's gross domestic product, according to the June Economic Review of Standard Bank Investment Corp.

Based on a gold price of $285 an ounce, the bank estimated GDP growth this year at 0.8 percent, barely one-fifth of the U.S. growth rate and insufficient to make a dent in unemployment.

Gold brings in 16.8 percent of the country's current account earnings. At $285 an ounce, this would amount to $4.1 billion. But at $255 an ounce, according to the bank's calculations, this would fall to $3.1 billion.

Between 1994 and 1998, annual gold exports fell from $6.3 billion to $4.4 billion, an economically debilitating drop in a country that needs every penny it can earn to offset the inequalities left by decades of apartheid.

The rand, the South African currency, also is linked to the price of gold. As the gold price declines, the rand must depreciate to keep foreign earnings in rands at the same level, according to Standard Bank's review.

At $285 an ounce, with an exchange rate of 6.32 rand to the dollar, an ounce of gold would sell for 1,801 rand. To bring in that same amount of rand at $255 an ounce, the rand would have to weaken to 7.06 to the dollar, a depreciation of 11.7 percent.

While the weaker rand would encourage exports, it could also increase inflation, making life more expensive for mine employers and employees. Ironically, this could increase the attraction of their gold.

"Apart from reasons associated with war and social instability, and despite the existence of new financial instruments gold may still be sought after in times of inflation," says the Standard Bank's review.

"Value is subjective, and throughout history people have attributed value to gold and have accumulated it as a means of storing their wealth."

Pub Date: 7/05/99