Why low gold prices first lead to production rises before falling

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Investors may become a little puzzled when they see reports prepared by respectable analytical bodies that suggest that annual mined gold output this year is likely to beat last year’s total.  Surely, continuing low gold prices, with perhaps half the world’s mires at or close to breakeven or below on an all-in-sustaining costs basis have led to mine closures (we have already seen some) and a slowdown in expansions and in new projects being developed?All the above is true!  Ultimately a prolonged period of low gold prices will indeed likely see a fall in global output of the precious metal.  Mines will close and new projects will be put on hold, but it would have taken time for these to come on stream anyway Natural wastage will take effect as old mines close through depletion of reserves while the new project delays will mean the production from the closures will not necessarily be replaced.

But short term – and by short term I am looking here at a one to two year period , or perhaps even longer – gold production will indeed rise.  The rises are already set in place.  Those big new projects which have been built over the past decade are still coming on stream, while those companies with operating mines, which have the capability to do so – mainly the larger operations – will just push higher grade ore through their mills at the existing milling rate in order to preserve revenues, although in many cases at the expense of shortening mine life.

In this way, at least the operation can carry on working without draining corporate cash resources. The mines which will close, though, if the gold price slump continues, will largely be at the lower end of the gold production table and will thus not lead to a big enough fall in production initially to counter the additional output from high grading and the new mines already under way.For gold producers, nowadays under strong pressure from institutional investors and shareholders to cut capital and operating costs, it also looks good in company financial and production reports in that higher gold output without having to add new mining and milling equipment, leads to a reduction in unit costs and an improvement in free cash flow. Much of today’s ‘keep the shareholders happy’ mantra, just like the activities of the financial community in general, and the media, which pushes this, is aimed purely at short term returns at the expense of long term prospects.  The miners can report falling unit costs making them look as though the board and management changes that have been implemented are having an effect.  The excised board and management scapegoats could well have implemented such changes themselves if that had been company policy – but it wasn’t, with the institutional investors at the time pushing for growth at almost any cost.  It can be very unfair to be in the wrong place at the wrong time.

However, whether annual gold production rises or falls by what would in any case be a relatively small percentage, is probably irrelevant to the path of the gold price.  It is not supply and demand which is currently driving the gold price – if it were the very movement of the huge volume of gold from west to east, which has been so well documented in recent months, would have been sufficient to drive the price far higher – even taking into account the outflows from the ETFs, which have been way more than countered by the eastwards gold flow.  There are other bigger forces at play here, forces that are also responsible for changing sentiment with regard to gold and thus persuading weak holders to offload their holdings.

Source: mineweb
Source:Bullion Bulletin

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