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Falling Bullion Prices Hurt Miners

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Mining output

The gold price has plummeted about 40% from a record $1,921.17 per ounce in September 2011 to $1,077.40 on July 24, the lowest since February 2010. The buyers had lost faith in the greenback as a store of value. However, prospects for higher US rates and a stronger dollar have pushed the prices south. Almost 10% of world bullion miners are losing money. The below chart gives the price movements in gold from 2008 to 2015.

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Bullion performance

Recently, gold, silver, and platinum have surged. However, palladium declined. From currency devaluations in China to Kazakhstan and a global sell-off in equities, global events have boosted demand for a haven. Gold futures for December expiry gained ~3% on a safe-haven note. Silver futures too gained 0.78%. However, gold and silver have a year-over-year loss of 5.12% and 5.75%, respectively, as of September 3. ETFs like the SPDR S&P Metals and Mining ETF (XME) and the Global X Silver Miners ETF (SIL) have also increased 3.38% and 3.42% on a 30-day trailing basis.

When mines last trimmed operations, bullion still slid as much as 29% into a bear market. Even production surpluses in 2010 and 2011 didn’t prevent prices from reaching records. Given the data mentioned above, it is uncertain whether gold prices will move on the surplus and deficit.

Miners’ balance sheets

Gold’s plunge is stressing balance sheets in an industry where the biggest producers are weighed down by a record debt load of $31.5 billion. These big miners include players like Barrick Gold (ABX), Newmont Mining (NEM), and AngloGold Ashanti (AU). AngloGold Ashanti had to cut some of its higher cost production. Profit margins for the 15 largest producers have dropped as much as 45% since 2011, while their debt has doubled to about $34.7 billion. NEM, AU, ABX, and GOLD together make up 21.5% of the VanEck Vectors Gold Miners ETF (GDX).

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