the recent Diggers and Dealers “conference”, that was recently concluded in Kalgoorlie, and posting them to this forum, but I notice in this weekend’s Australian Financial Review that that irrepressible financial satirist, Trevor Sykes, – also known by his pen-name “Pierpont” – has conveniently done the hard work for me.
Here are some of the more salient points (drawn largely from the Pierpont article) that will likely have a bearing on the price of gold going forward:
a. The revenues of the world’s top 40 mining companies in 2007 had grown by 32 per cent, but costs (especially fuel) had risen by 38 per cent, eroding net margins.
b. China is now the world’s largest gold producer, ahead of Australia and then South Africa. South Africa’s output is not likely to increase due to power problems and the challenging depths of their major mines.
c. The Australian resource industry’s greatest threat is from Canberra and the proposed “carbon credit” scheme that has the potential to seriously erode the bottom line of many mining companies. (As an aside, some major Australian mining companies are looking to source their energy requirements from non-carbon sources… geothermal energy from hot fractured rocks being the main contender.)
d. Kalgoorlie’s “super pit” (see link - jointly owned by Newmont and Barrick) is now a very high-cost operation, producing gold at a cash rate of $US860 per ounce. Its operation is currently under review.
These factors illustrate the upward price-squeeze that is developing on above-ground reserves of gold. Miner’s margins are decreasing as costs increase for fuel and labour. The cost of carbon is a wild-card that is becoming ever more ominous. High-margin, new mines are going to be hard to come by and, with the present credit squeeze, only the better start-ups are going to get the nod from cash-strapped financiers. And then, on the demand side, there is the inexorable move to “middle-class status” of large numbers of people in the so-called “developing world” – China and India in particular – presumably increasing the demand for gold in jewelry and “investment” forms.
Sure, the price of gold in $US terms is going to swing and gyrate with many factors, but my own judgment is the price will trend upwards in all currencies (present down-draft aside) for many years to come as the above factors (and probably many others) play out.
