Look at the gold price in producer currencies – it is mostly running higher ytd

When the gold price fell back sharply from its dizzying 2011 peaks, the internet was awash with predictions from analysts that the gold mining industry would be decimated and see substantial closures and cutbacks.  But in the four years since gold peaked, and then fell back by around 40% in U.S. dollar terms, there may have been cutbacks in capital programmes, but gold production, counter to all these predictions, has actually continued to rise.  In part this has been due to some major new gold mining projects which were still in their development phase and have since come into full production, but also because many of the predicted closures have just not come about.

In part this may be that sometimes the costs of closure are actually higher than keeping a mine open and hoping for a gold price pickup to return it to profitability. But it is also because in most gold mining nations the gold price has not fallen nearly as much in their own currencies (in which most of their mining costs are incurred) as in the U.S. dollar against which most analyses are conducted and is the currency in which most gold producers are actually paid.

A fascinating graph from Nick Laird’s www.sharelynx.com  website shows gold price performance in U.S. dollars against a gold price index for the top 20 nations by GDP, which demonstrates that on average the gold price fall in these nations has only been about half of that in U.S. dollar terms so the economics of keeping mines open may be far better than the analysts have even envisaged.

There have also been huge media headlines every time the gold price falls in U.S. dollars and if one were to be swayed by these one might draw the conclusion that gold is at its last gasp and it has become irrelevant as an asset class.  This was particularly so following the recent gold bear raids which took the price down from the $1150s to below $1080 (it has since recovered back to around the $1120s at the time of writing).  But what virtually none of this media coverage took into account was that the actual decline for the year to date was actually quite small – even in U.S. dollar terms – and that in the currencies of most major gold producing nations, the price is now higher in terms of their domestic currencies than it was at the beginning of the year – in some cases substantially higher!  See table below:

World’s Top 10 Gold Mining Nations:  Gold prices in Domestic currencies Year to Date

Global Rank 2014 Country Gold Price Jan 1 Gold Price Aug 19 % Rise or Fall
1. China CNY7442.67 CNY7167.53 -3.7%
2. Australia AUD1468.64 AUD1526.68 +4.0%
3. Russia RUB72794.48 RUB73601.96 +1,1%
4. USA USD1199.25 USD1121.95 -6.4%
5. Peru PEN3580.36 PEN3629.27 +1.4%
6. South Africa ZAR13856.13 ZAR14434.19 +4.2%
7. Canada CAD1393.05 CAD1465.28 +5.2%
8. Mexico MXN17672.15 MXN18400.41 +4.12%
9. Ghana GHS3843.6 GHS4500.8 +17.1%
10. Brazil BRL3184.61 BRL3886.91 +22.1%

Aug 19 prices are a snapshot of the spot gold price at the time of writing.

Sources: www.24hgold.com, www.lawrieongold.com

Note: If we had taken a year start date of Jan 2nd, the first major trading day when the gold price dipped sharply, the fall in gold price in Chinese yuan would have been less than 2% year to date and the rises in most other countries several percentage points higher .

 

Thus it may well be that most of the pressures on gold mining companies to shut down operations and curtail expansions may well be based on somewhat misleading, even though accurate, information which is perhaps only really relevant to production in those countries, like the USA – and to a slightly lesser extent China now that it has devalued the yuan.

The major metals consultancies are now all predicting a continuing small growth in annual gold output this year with the likelihood of this output plateauing in 2016 and then at last turning down, but still slowly, if there is no significant gold price rise before then.  Even if there is a decent gold price rise this decline could still well happen given the cutbacks imposed on the major miners by their shareholders which have had them cutting back on exploration, expansion projects and new capital developments, as well as mining where they can to higher grades.  All these taken together suggest a significant dip in the necessary growth prospects ahead to replace natural wastage as older mines run out of ore and see declining grades.  Such is the cyclical nature of all mining economics!

But whether this will actually then have a direct impact on the gold price is somewhat less certain and may still depend on the speculators and those in the political and central banking arena who may have a vested interest in keeping the gold price under control.  Central bankers and politicians in particular fear gold as if allowed to float free it would provide a drastic indictment of the deterioration in purchasing value of the world’s current fiat currency systems and counter the feelgood factors so beloved of, and continually promoted by, ruling party politicians in virtually all nations.  Many central banks may well officially be ‘independent’ of government, but that does not mean that there is no contact, nor that they do not follow the party line lest their ‘independence’ is taken away from them again!

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