Gold price nearing a point where mine cuts and shutdowns are about to increase
Gold price, down by 36.7 percent in the past three years, is now nearing the verge after which a number of mines are likely to scale down production, while others would shut down.
The price of gold, having already slid down by over a third for the past three years, is now nearing the tipping point at which an increasing number of producers would be forced to scale down their output or even shut down altogether.
There have been several instances of mines already stopping output in the last year and a half, although these are still below industry watchers’ expectations. Producers have rather resorted to costs cutting and reworking of mines, towards the extraction of higher grade material. However, given bullion slumping to a 9-month low, $1,208.36 per ounce, the above measures may prove insufficient. Below $1,200, there are definite hazards for more mines hitting a rough period.
The cutback in production and mines shutting down will yield further financial implications for investors and producers, as the decline in gold mining stocks since September 2011 has amounted to 67 percent.
Now, steeper cuts and closures can be expected, as most miners have not taken measures against potential losses, by hedging, or selling the precious metal in advance at fixed rates. Just a small part of the production, about 129 tones, was hedged by end June, whereas in the 1990s there was a hedging peak at about 3,000 tones. Then, from 2000 to 2012, the hedging practice was not favored, as hedged producers could not capitalize on the spiking gold prices in that period.
With the falling prices of the precious metal, it is estimated gold miners have cut all-in cost for producing an ounce of gold, down to around $1,350 for the first half of 2014, compared to the 2013 full-year $1,696 an ounce.
According to Citibank, last month 40 percent of the gold industry had an all-in cost of $1,331 per ounce, with gold price at $1,290. On Friday, bullion traded at $1,215 per ounce.
In those circumstances, the mines facing the greatest risk of cutting output or shutting down are the ones with high-cost of production. Mines like Yatela, of Iamgold Corp and AngloGold Ashanti Ltd in Mali had, in the quarter to end of June, all-in sustaining costs of $1,910 per ounce, and suspended active mining in 2013, pressured by high costs and sliding gold prices. In the quarter to end June, the Iamgold Rosebel mine in Suriname had all-in sustaining costs of $1,216 per ounce.
According to some industry watchers, there is place for optimism, as a steep drop in production can boost prices. Gold is indeed an asset which can be boosted by uncertainty and apprehension of inflation, but according to some investors the effect of diminished supply will inevitably put a floor under bullion prices.
With gold trading below $1,500, mines will be reluctant to invest into new projects. In two years, the gold is expected to jump again. Now the mining industry is nearing its all-time high of production and deposits are found with difficulty. That is good news for the price of gold in the longer term.
