Will Miners Save Gold?

The price of gold cannot decline and stay below the gold production costs. Myth or fact? 

So if the central bank demand for gold is not able to boost the price, then maybe mines will help? We refer here to the popular narrative that the price of the yellow metal cannot decline below its cost of production. But do gold production costs really set a floor for bullion prices?

We sincerely doubt it. If we were unkind, we would have asked “which production costs”? Each mining company produces at different level of costs. In 2017, they ranged from to $620 to $1000, depending on the region, according to the GFMS Gold Survey 2018. But these costs differ also within these regions, depending on type of mine, the quality of gold ore, local taxes and regulations, and on myriad of other factors. So at which level is the floor: $620 or $1000? 

Another issue is how to calculate these costs. Should we include depreciation? Or general and administrative expenditures? And what if gold is a by-product? As you probably know, the industry reports both the cash costs – which is the cost to mine gold-bearing rocks, process the ore, and sell the gold – and the all-in sustaining cost, which also include sustaining capital and G&A expenses, but not project capital expenditures.

Please also note that companies have a lot discretion in classifying what are these sustaining costs. The costs we provided above were cash costs. Meanwhile, the all-in sustaining costs ranged from $750 to almost $1,200. So we now have four numbers – which one should we use?

But let’s assume that the lowest of them creates the floor for gold prices. What are the forces that allegedly prevent the price of gold from sliding below the cost of production? Well, the idea is simple: when prices are below costs, the production becomes unprofitable. The producers go bankrupt, so the supply drops, which increases the price.

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