Why Devaluation of Domestic Currency Is Beneficial for Miners



Advantage for non-US miners

The United States stands at number four in terms of precious metals production. But the latest published US data show that gold production in the United States has fallen 14% year-over-year, from 17.3 metric tons in May 2014 to 14.9 metric tons in May 2015. This is less than a fourth of what’s moving through the SGE (Shanghai Gold Exchange) in a week. We’ll look at these jaw-dropping withdrawals from SGE in the next article.

According to economists’ reports, US gold output could fall below 190 metric tons in the current year. Canada had gold production close to 150 metric tons in the past year. This year, Canada has already seen a rise of ~20% in the yellow bullion production.

Looking at the current statistic, Canada may leap-frog South Africa, Peru, and the United States, as output has been steadily falling in these regions.

Article continues below advertisement

Mining companies

Most of the gold mining companies in countries other than the United States, such as Yamana Gold (AUY), Kinross Gold (KGC), Sibanye Gold (SBGL), and AngloGold Ashanti (AU), have rejoiced in the stronger dollar. The increase in the dollar meant devaluation for domestic countries in which miners incur their costs.

Australian, Canadian, and South African precious metals miners have their revenue in the dollar since gold is dollar-denominated. Their expenses, on the other hand, are domestic currency denominated, which has seen devaluation.

South African miners in a fix

South Africa contributed about 80% of the world’s gold production in 1970, with an output of 1,000 metric tons of gold per year. Currently, it’s seeing a fall in production with a prediction of ~150 metric tons of gold for 2015, thus slipping to seventh position from number one in 1970. South Africa also has rising concerns over the aging mines issue. Worker wage rate hike negotiations are also adding fuel to the fire.

ETF performance

Leveraged gold ETFs like the Direxion Daily Junior Gold Miners Bear 3X ETF (JDST) have risen about 7% on a five-day trailing basis. The Direxion Daily Junior Gold Miners Bull 3X ETF (JNUG) has fallen about 8% on a five-day trailing basis as of September 10.

The above mentioned non-US mining companies, AUY, AU, KGC, and SBGL, make up ~14% of the VanEck Vectors Gold Miners ETF (GDX).


More From Market Realist