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Implication of Slowing Global Mine Supply on Gold Prices

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Global mine supply

The latest data from the World Gold Council (or WGC) showed that the mine supply was down for the second consecutive quarter in 4Q15. China’s domestic production was marginally down in 2015 as compared to 2014, mainly due to lower gold production as a byproduct of copper mining operations.

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Mine supply declines

Other declines occurred at the world’s largest mines, including the Yanacocha mine, owned by Newmont Mining (NEM) and Buenaventura (BVN), and the Lagunas Norte mine, owned by Barrick Gold (ABX). The mechanical failure at Pueblo Viejo and the transition to lower grades at Oyu Tolgoi in Mongolia also led to a year-over-year decline in gold production.

Exploration spending has declined over the last year. Lower gold prices were the main reason for the gold miners (GDX) to cut exploration spending. If the current uptrend in gold prices is sustained, gold miners might accelerate exploration spending. However, the lower grades are still expected to decline, necessitating still higher gold prices to mine the same number of ounces of gold.

Mine supply and gold prices

Over the long term, a consistent reduction in exploration spending and declining reserves could lead to a reduced mine supply. While the mine supply forms a small percentage (~1.5%) of the overall available gold supply above ground, it’s an important source of incremental gold supply, as it’s the only real swing variable in overall total supply dynamics. Any impact on the mine supply over the long term could push gold prices higher.

Agnico-Eagle Mines (AEM) and Yamana Gold (AUY) form 5.6% and 2.9%, respectively, of the VanEck Vectors Gold Miners ETF’s (GDX) holdings. The SPDR Gold Trust ETF (GLD) and the iShares Gold Trust ETF (IAU), on the other hand, provide exposure to physical gold prices.

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