Will Production Costs Set a Long-Term Floor Price for Gold?

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Precious Metals

Will production costs set a long-term floor price for gold? (If you missed the key strategies that gold producers will have to undertake to remain profitable, don’t miss Part Four and Part Five of this series.)

While the cash costs (mine-level costs) will be a decisive factor over the primary supply of gold in the medium term, the all-in sustaining costs will have a significant bearing on the long-term mine supply of the metal.

In 2012, the total cash costs in the gold mining industry averaged around US $800/troy ounce and are expected to have risen to US $900/troy ounce by the end of 2013.

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This implies that production cuts may not be significant in the next 6-9 months as most of the leading miners operate at cash costs (mine-level or short-term costs) well below the prevailing average price of gold i.e. US $1,400/troy ounce.

However, the price of gold is likely to remain in the range of US $1,100-1,400/troy oz. over the next two years. This may lead some of the leading miners like Gold Fields, Newcrest, Harmony, Freeport, IAMGold and AngloGold Ashanti to halt production in some of their high cost mines in Africa and Australia or offload some of these assets, affecting nearly 4%-5% of annual global mine production of gold.

For the short term though, traders would be closely watching the Fed’s actions on QE3.

Quantitative Easing: The Wild Card

The average daily volume of gold traded at commodity exchanges through derivative contracts and ETFs in New York and London amounts to nearly 30% of annual global mine production of gold, causing the price of the precious metal to be greatly influenced by investor sentiment and monetary policy actions in the US and Europe.

Thus, although gold may fall below the US $1,100/troy ounce level for a while, once the monetary stimulus in the US is scaled down – as Bernanke and the Fed have already announced – the long-term support level for gold price is likely to range between US $1,300-1,400/troy ounce.

Up next: Conclusions and takeaways on the future of gold mining. 

FREE Download: The Monthly MMI® Report – covering the Precious markets.

MetalMiner welcomes guest contributor Moonmoon Basu, a senior research analyst at Beroe Inc., tracking base metals & precious metals for over two years and specializing in price forecasting. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

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