Gold prices are expected to rise due to supply factors. The cost of gold production is at an all-time high due to the gradual depletion of veins coupled with rising global labor costs. There is a growing expectation that mining at loss-making mines will come to a standstill. In the United States long-term interest rates rise in the background, does not produce interest gold will remain in the high price range.
As an international indicator, the price of New York gold futures (the most actively traded settlement month) stood at $2,044.1 per ounce on February 27, up $5.2 (0.3%) from the previous day.
Long-term U.S. interest rates rose to their highest level in three months on Feb. 22 due to expectations that the U.S. Federal Reserve Board (FRB) would delay a rate cut. Even with the rise in interest rates, the price of gold did not plummet, but hovered around $2,000, showing a firm market.
The market has realized that rising mining costs and the like have led to constraints on gold supply.
The average cost of production (AISC), which consists of labor costs for mining, energy costs, and vein exploration costs, reached $1,343 per ounce from July to September 2023, according to Metals Focus UK, a precious metals consulting firm. This is a 39% rise from the pre-New Crown epidemic (July to September 2019), a quarterly record high. Some analysts believe that the upward trend is still maintained.
Behind the higher production costs is the deteriorating condition of gold veins.Metals Focus said in a December 2023 report that “mining costs at the U.S. mines held by Canada’s OceanaGold are up about 97% from a year ago due to processing of low-grade ore.”
Gold, unlike crude oil, which can sustainably develop new veins such as shale oil, is hard to find on a large scale. The total amount of gold ever mined is about 212,500 tons. Only 59,000 tons can now be confirmed as buried, according to the World Gold Council (WGC).
In order to maintain production, existing mines must be continually mined. Concerns about declining gold ore grades have already emerged.
Data from Metals Focus shows that gold ore grades are shown to contain 1.33 grams of gold per tonne in 2023, an average decline of 3% compared to the previous year.
Low-grade ore increases the cost of electricity and chemicals, among other things, when refining gold.
At the same time, the operating environment is getting tougher. South Africa was the world’s largest gold producer, now 500 meters underground and other relatively close to the surface of the gold vein has been mined out, will be in the underground 1000 ~ 1500 meters of gold mining. Transportation materials, regulate the underground temperature required by the cost of electricity will increase.
Global inflation has also accelerated the rise in gold production costs. In addition to energy-related costs, the cost of labor to mine ore has also risen.
In North America, many important gold veins are said to be located in national parks that emphasize environmental protection. Costs associated with protecting the environment, such as the disposal of ore and chemicals after mining, are also increasing.
The impact of rising mining costs has become increasingly evident since the beginning of 2024. The world’s largest gold mining company, Newmont of the United States, announced on February 22, 2023 October to December financial results show that the final profit and loss of 3.139 billion U.S. dollars loss. Compared with the same period of the previous year (loss of 1.477 billion U.S. dollars) the loss expanded. The cost of production of gold reached $1,485 per ounce, up 22% from the same period of the previous year.
Newmont’s share price (as of Feb. 27) was down 28% from the end of 2023, hurt by deteriorating profits. Similar trends caused alarm, with Canada’s Barrick Gold down 20% and Agnico Eagle Mining down 12%.
The VanEck Gold Miners ETF, an exchange-traded fund that includes the world’s representative gold mining stocks, was at $26.03 as of February 27, down 16% from the end of 2023.
There are projections that the loss-making mines with production costs exceeding the price of gold have reached about 10% of the total. There is a view in the market that mining will slow down and with it the supply of gold.
Currently the gold produced through ore is about 3,500 tons per year. Yuichi Ikemizu, a representative director of the Japan Precious Metals Market Association, pointed out that no new gold veins have been discovered in the past 15 years or so. Gold production may peak at the current level and decline to about 3,000 tons as the gold price moves.
Tetsu Yoshida, a commodity analyst at Rakuten Securities Economic Research Institute, said, “Labor and electricity costs, etc., are expected to rise, and on that basis the analysis says that costs taking human rights and the environment into account are also expected to increase, and the cost of (gold) production may continue to rise in the future.” In the future, the supply-side factors that support gold prices may be realized.