Gold News

Gold Mining Costs "Put Floor" at $1150, Supply to "Decline Rapidly"

Gold miners set to cut reserves and output, supporting market price say analysts...
 
GOLD MINING companies are set to put a floor under the market price according to fund managers and analysts, because of high production costs forcing a likely cut to output.
 
During the 12-year bull run, "Costs went up far more quickly than anyone realised," says Joe Foster at Van Eck's $650 million Gold Fund in the US.
 
"No one [at the major gold mining companies] had their head around the cost inflation until it was too late," Foster believes, and with prices falling 30% in 2013, many mines are now running at break-even or below.
 
Despite predicting further investor selling, plus the possible return of gold miner hedging in 2014, analyst Nic Brown at French bank Natixis says "We expect that rising costs of production (wages, energy etc) will ultimately put a floor under gold prices.
 
"We would expect this process to begin somewhere around $1150 per ounce."
 
Forecasting further price falls ahead, Swiss investment and bullion bank UBS has now upgraded its long-term gold pric e forecast from $1100 to $1300 per ounce "due to rising costs."
 
Although UBS agrees that "a return to producer hedging threatens" – potentially adding new supply to world markets as gold miners borrow gold to sell forward at current prices for fear of further falls ahead – the Swiss investment and bullion bank's team now forecast a 6% drop in global gold supplies during 2015, marking the start of what they currently believe will be a growing supply/demand deficit.
 
By 2018, the bank's current forecast is for supply to be 630 tonnes short of demand totaling 4,600 tonnes at a price of $1300 per ounce.
 
Here in 2014, "This is definitely the year we will see [gold mining] reserves falling across much of the sector," reckons analyst Jorge Beristain at German investment and London bullion bank Deutsche, with management forced to cut the quantity of gold underground they report as being economically viable to mine in future.
 
"Reserve calculations have been based on a series of [price and cost] suppositions that in the present environment are no longer tenable," Beristain says.
 
As it is, " Very few gold companies are actually making significant profit," Bloomberg TV was told last week by Evy Hambro, manager of the $8 billion World Mining Fund at asset managers and service providers Blackrock.
 
With lower prices now forcing cost-cutting and more cautious M&A decisions, "If this trend of better management continues, supply will start to decline quite rapidly," Hambro believes, as expensive projects are delayed or mothballed.

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