Gold supply influences gold prices
In the previous parts of this series, we looked at motivations for buying gold. Supply-side factors also influence gold prices. All else being equal, a short-term decline in mining production could persuade buyers to pay more for gold.
Increasing gold production
The World Bureau of Metal Statistics provides global mining production data monthly. The figure for December was 258.6 tons compared to 253.7 tons in November. This is slightly lower than October’s production of 254.5 tons.
For all of 2014, production was 2,907.8 tons, which is higher by 3.6% compared to 2013. However, the rate of production increase has slowed down in recent months.
Production increased mainly because most mines are long-term undertakings. So regardless of the fall in gold prices, it would hurt mining economics more to shut down in the short term and restart later. However, we are seeing a slowdown in the rate of production growth.
Some gold companies, including Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM), are high-grading at certain mines. High-grading means the high-grade portion of a mine is mined first. This increases the grade of the mined ore. It also lowers the cost per unit. At the same time, this trend is bad for long-term supply because it depletes reserves very quickly.
Gold companies such as AngloGold Ashanti (AU) and Agnico Eagle (AEM) have also slashed capital and exploration spending. As a result, there aren’t many new projects coming on line. This will pressure the long-term supply of gold.
Many industry experts, including the World Gold Council, believe that 2014 was the peak year for gold mine production.
Long-term supplies could plateau
Slowing production rates mean it won’t be long before supplies plateau. Lower grades will put upward pressure on costs. These developments could boost gold prices and gold-backed ETFs such as the SPDR Gold Trust (GLD) and the VanEck Vectors Gold Miners (GDX). GG, ABX, and NEM together make up 26.2% of GDX holdings.