Gold mine production
In the previous parts in this series, we discussed the motivation to buy gold. We looked at how it impacts gold prices. There are also supply side factors that could influence gold prices. All else being equal, a short-term decline in mine production could persuade physical buyers to pay more for gold.
Why is gold production increasing?
The World Bureau of Metal Statistics provides the world mine production data on a monthly basis. The data for August was 237.4 tons. This is 1.3% higher month-over-month. It’s 0.3% higher year-over-year (or YoY). Year-to-date (or YTD)—until August—the world production is 1,840 tons. This is 1.2% higher than the same period last year.
Gold prices fell 28% in 2013. They’ve been almost flat for 2014. This is mainly because most of the mines are long term. It would hurt mine economics more to shut them down in the short term and restart them later.
High grading and Capex cuts
Some gold companies—including Barrick Gold (ABX), Goldcorp Inc. (GG), and Newmont Mining (NEM)—are going for high-grading at some of the mines. High-grading is when the high-grade portion of the mine is mined first.
This increases the grade of the ore that’s mined. Also, it lowers the cost per unit. However, this trend is bad for long-term supply. It depletes the reserves very quickly.
Gold companies—including ABX, AngloGold Ashanti (or AU) and Agnico Eagle (or AEM)—have also slashed capital and exploration spending. As a result, there aren’t many new projects coming online. This will put pressure on gold’s long-term supply.
Many industry experts—including World Gold Council (or WGC)—believe that 2014 will be the peak year for gold production.
Although gold production is increasing, it won’t be long before the supply plateaus. Lower grades will put upward pressure on costs. All-in sustaining cash costs for the first half of 2014 were $1,350 per ounce. This is above the gold price for the period. This should put pressure on the production going forward.