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13 January 2015

Gold price may be affected by marginal miners not going to company heaven

Izabella has a post on FT Alphaville on the changing structure of the oil market. The point of interest for me is that the speed with which shale oil can be developed, as well as shut down and restated, means that "the clearing price of oil in a shale world needs to be much, much lower to dissuade unnecessary investment, and also needs to rise much less significantly to encourage it when it is necessary".
 
The take away for the gold market is that the run up to $1900 no doubt resulted in a lot of marginal gold mines being developed that probably shouldn't have been. At current prices these are not profitable on an all in basis but they are holding on as prices do cover marginal cash costs. We need a much, much lower price to really kill this potential supply but this hasn't happened - we haven't seen large numbers of bankruptcies or care & maintenance mothballing occurring. The fall in the oil price will probably give these mines some breathing space.
 
As the money spent on developing these mines is a sunk cost, the problem is that they will stay around and we only need the price "to rise much less significantly to encourage" them to continue producing gold on a cash costs basis. The result is that this may crimp increases in the gold price compared to the situation where a lot of the sub-standard projects would have been cleaned out and the potential for increased supply on any price increased would have been muted.
 
Rick Rule has been talking about how few listed junior miners are worth investing in. Unfortunately the oil price drop may mean that the others don't "go to company heaven" resulting in a sideways gold price as they keep on producing any time the price shows strength and affecting the marginal supply/demand balance.
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6 comments:

  1. Fazsha15 January, 2015 01:17

    I doubt that the marginal gold contribution of these mines on the verge of bankruptcy is THAT much, and the total gold production is probably less than 1% of total gold supply. Besides, what if all these mines went bankrupt and were immediately financed with 100% equity to resume business? Just because their margins might be low doesn't mean that they don't deserve to be in business. Supermarkets have extra low margins as well, but the volume they do makes it a rational investment.

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  2. Anonymous15 January, 2015 06:43

    The total gold supply is not a well defined quantity. At prices sufficiently high all gold above ground might come to market. At the opposite extreme price of $1 per ounce very little gold (if any) will come to market. So total supply is a function of price. However, it is not clear whether the price of gold is really a market price. Gold and oil are political commodities and their pricing is therefore subject to forces difficult to quantify.

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  3. rowingboat15 January, 2015 07:14

    Look on the bright side Bron... we're not going to see a 150% rise in global mine production that we had in the last bear market (1000mt to 2500mtpa), 1980-2000.
    Pierre Lassonde has expressed the view that production will fall precipitously from 2017. More likely (in my view) production will remain flat until the next round of 10-baggers sees a flood of capital into the sector, rejuvenating exploration and project works.
    The 'modest' rise from $250 to $400/oz saw the HUI experience its best gains in % terms, from memory 30-300, yrs 2000-2003. I expect similar to happen again for punters who get the timing right.

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  4. Anonymous15 January, 2015 07:21

    It is not clear? Its pretty clear unless youre brand new to the analysis

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  5. Anonymous15 January, 2015 07:26

    The fake supply from the bullion banks shorting what they don't have will have to be replaced to satisfy the additional demand when the masses find out the real world shortage all at once.That won't even nearly be accomplished at $5000 gold. This is why China produces gold ay $2500 an ounce without flinching. They're not nearly as dumb as the numbskulls in the US that are fooled by every negative announcement.

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  6. Bron Suchecki15 January, 2015 18:02

    From Reuters: "critics say it comes at the expense of future returns, damaging the industry's longer-term appeal for more conventional investors. They may also be keeping alive production that would not be viable at current spot prices, delaying a rebalancing of supply and demand."

    http://mobile.reuters.com/article/idUSL6N0UT26F20150114?irpc=932

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