Miners will need $3,000 gold price to be profitable, WGC head says

[Unobtanium]

fantastic graph! I presume, the width of each bar represents producer's share in the global production?

It was not explained in the article, but that was my conclusion too.

 

[benjamen]

Problems for the South African mining companies continue:
http://www.24hgold.com/english/news...10020&redirect=false&contributor=Chris+Powell

"Amcu and the National Union of Mineworkers have tabled wage increase demands for entry-level workers of between 100% and 60% of prevailing salaries."

"The gold price is now R412,200/kg and closer to 60% of mines are in a loss-making or marginal position."

"Using the new cost reporting metrics proposed by the World Gold Council last month, the average all-in cost for the world's top five global gold mining companies was $1,467/oz in the first quarter of this year"

"By next year, about half of global production will need a break-even gold price of $2,400/oz, using a 10% year-on-year mining inflation assumption, he said."
:flail:

"Chamber senior executive Roger Baxter has said that between 2007 and 2012 there was a 238% increase in electricity prices for mining companies and a 12%-a-year rise in the annual remuneration paid per worker, roughly five percentage points higher than producer inflation."

"With declining production there is less gold to pay for fixed costs. Cash costs have increased by 23% in the past five years for South African gold mining companies, he said."

 

[ancona]

Just like unions everywhere, they are killing the host. I would think that closing down mines, when it happens, will have a serious and material impact on metals prices as product disappears from the marketplace. while I understand the need for unions, too many times they use their clout to demand outsized pay and benefits, which not only results in higher prices for finished material/products, but disrupts local economies where local wages for non-union work are far less than union wages.

 

[Unbeatable]

Another 5%+ drop in production...

AngloGold Ashanti, the world’s third biggest gold producer, said it would produce 4m to 4.1m ounces of gold this year, rather than the 4.1m to 4.4m ounces previously planned, in response to the fall in its product’s price

http://www.telegraph.co.uk/finance/commodities/10194201/Gold-price-plunge-saddles-miners-with-billions-worth-of-writedowns.html

.

 

[Unobtanium]

We continue to see more and more information and news in the precious metals community that paint the picture of the POG and POS right now as akin to dragging a beach ball further and further underwater. Something has to give...


From Mark Mahaffey, co-founder of the London-based Hinde Capital:

http://bullmarketthinking.com/hinde...n-pays-well-to-be-contrarian-of-the-extremes/

When asked about the prospect of gold mining stocks at this time, Mark commented that,

“Companies should fail by the hundreds and production will fall dramatically unless the gold price improves quickly…our analysis…is the price of gold that will produce a zero number in the current free cash flow column for the whole industry (i.e. breakeven, cash neutrality)…it’s $1750 an ounce.”

Every single [expense] of a mining company needs to be taken into account [and] divided by the amount of ounces you’re digging out of the ground…oil is at $109 and climbing, labor unions are demanding more money and the cost of regulation keeps going up.

[So] today with gold trading at $1300 an ounce and production at $1750 and climbing, gold is trading at 75% of its production cost—and that has never happened before.

When gold traded to $800 an ounce in 1980, the cost of extraction was $100 an ounce. So gold traded eight times its production costs. Now that’s a bubble.”

 

[DSAbug]

jeez.. the cost of production isn't close to $1750 so i have no idea where he's pulling that number. I look at my sheet of JUNIORS and I see very few over 1100. I have names with 400 per ounce production cost as well.

I think these guys are seeing that the miners are beaten up and are trying to explain it. They are probably upside down on his gold/silver investments and is fishing for a bullish catalyst. Since everyone hates gold miners, they are easy to pick on right now. IMHO they are being way too doomsday about their prospects. Since 1900, the gold miners have been this oversold 4 times. Those were lows, not the beginning of a decline.

 

[Unobtanium]

jeez.. the cost of production isn't close to $1750 so i have no idea where he's pulling that number. I look at my sheet of JUNIORS and I see very few over 1100. I have names with 400 per ounce production cost as well.

I think these guys are seeing that the miners are beaten up and are trying to explain it. They are probably upside down on his gold/silver investments and is fishing for a bullish catalyst. Since everyone hates gold miners, they are easy to pick on right now. IMHO they are being way too doomsday about their prospects. Since 1900, the gold miners have been this oversold 4 times. Those were lows, not the beginning of a decline.

Yes, I thought 1750 was high too, but the interesting point that I got out of this was the contrast in the mining cost vs POG around 1980 vs that same ratio today.

 

[DSAbug]

Yes, I thought 1750 was high too, but the interesting point that I got out of this was the contrast in the mining cost vs POG around 1980 vs that same ratio today.

There is no fever like gold fever.

 

[benjamen]

jeez.. the cost of production isn't close to $1750 so i have no idea where he's pulling that number. I look at my sheet of JUNIORS and I see very few over 1100. I have names with 400 per ounce production cost as well.

I think these guys are seeing that the miners are beaten up and are trying to explain it. They are probably upside down on his gold/silver investments and is fishing for a bullish catalyst. Since everyone hates gold miners, they are easy to pick on right now. IMHO they are being way too doomsday about their prospects. Since 1900, the gold miners have been this oversold 4 times. Those were lows, not the beginning of a decline.

I agree that $1750 is a tad high.

From earlier in this thread:
http://www.pmbug.com/forum/f13/mine...table-wgc-head-says-951/index5.html#post23182
"Using the new cost reporting metrics proposed by the World Gold Council last month, the average all-in cost for the world's top five global gold mining companies was $1,467/oz in the first quarter of this year"

However, as costs are going up at around 10% a year, it may not take long to hit that number.

 

[pmbug]

US gold miner Newmont has made heavy write-offs against its Australian mines - Boddington and Tanami - totalling $US1.5 billion ($1.62 billion) following the slump in the gold price.

The group is in the process of cutting its global workforce by a third as it seeks to ensure it can survive with the downturn.
...

http://www.smh.com.au/business/mini...ont-hit-with-16b-writeoff-20130726-2qpcf.html

Goldcorp Inc. reported an enormous net loss of US$1.93-billion in the second quarter after taking a big writedown on the Penasquito mine in Mexico.
...
The US$1.96-billion writedown reflects the exploration potential of Penasquito, Vancouver-based Goldcorp said. It is the company’s first major impairment charge this year, as it previously avoided the writedowns that have plagued competitors like Barrick Gold Corp. and Kinross Gold Corp.

“Penasquito continues to possess strong exploration upside, but due to lower metals prices, the current in situ market value of exploration potential has decreased significantly,” chief executive Chuck Jeannes said in a statement.
...

http://www.theprovince.com/business...loss+Penasquito+impairment/8706400/story.html

Goldcorp And Why Gold Miners Are Getting Crushed: Massive Cost Inflation, Dropping Prices

...
Goldcorp expects total cash costs of $1,000 to $1,100 per ounce on an all-in sustaining cost basis.
...

http://www.forbes.com/sites/afontev...rushed-massive-cost-inflation-falling-prices/

 

[DSAbug]

This is why i hate the majors.. You have a 2 year correction and then they decide to cut production. No vision.

 

[Unbeatable]

World's largest gold miner looking to cut up to 25% of Gold production.

Mines with all-in costs above $1,000 an ounce contribute about 25 per cent of Barrick’s expected 2013 gold production. Mr. Sokalsky said he is “prepared to make the tough decisions. Our goal is to significantly reduce the percentage of mines in our portfolio that are above $1,000 per ounce and we're working on the plans to do that.”

..such as Porgera, its major Australian project, which posted an all-in sustaining cost of $1,306 per ounce in the second quarter. (All-in sustaining costs include labour, administrative fees and exploration expenses, among others.) Barrick’s share of African Barrick Gold assets, which the company spun off in 2010, also weighs on profitability with all-in sustaining costs of $1,550 to $1,600 per ounce.

http://www.theglobeandmail.com/repo...whopping-loss-of-856-billion/article13544986/

 

[ancona]

I think it's awesome! The way I see it, if these guys close down enough production to force prices up, it will take quite some time to bring the mothballed mines back up to speed, helping to maintain any upward momentum given to phyz as a result of falling production. As it is, mines all over Africa are in turmoil over labor protests and strikes. There is word of work slow-downs as a protest means at mines in South Africa as well, which hurts even more than a strike since you are getting no-low production but are still paying all of the operating costs and labor.

Obviously, there will be pain for those who hold shares in these companies, but they have no choice but to cut off those mines that are operating above the spot price of metal.

 

[Aubuy]

Obviously, there will be pain for those who hold shares in these companies, but they have no choice but to cut off those mines that are operating above the spot price of metal.

Pain would be an understatement. More like cardiac arrest :flail::judge:

 

[ancona]

Aubuy,
I don't wish pain on anyone, but it's time for metals to get fucking real already. This paper distortion has gone on for far, far too long. The futures market used to be a place for legitimate hedging and price discovery, but with the advent of computers and "bank holding companies" it has become a mafia operated rigged casino, where the only winners are the banks and those who hit it by complete accident, because I can assure you that "they" don't want any winners besides themselves.

Farmers used to be able to protect themselves with futures, but can no longer trust that they won't get "Corzined" so they have backed way, way off. This can only hurt the market because as a result, the only real players are purely speculating and doing so with someone else's money.

 

[Potemkin]

...I guess Rickards was right about gold price levels above 3,000 $.

 

[Unbeatable]

http://www.reuters.com/article/2013/08/22/us-safrica-strikes-idUSBRE97L0BA20130822

They've been talking about striking for a while, finally looks like they might do it. (South Africa)

National Union of Mineworkers (NUM) spokesman Lesiba Seshoka said the union would be consulting its gold industry members over strike action in the next few days.

"The earliest we will issue companies with notice of the strike is Monday next week," he said.

With such notice normally being given 48 hours in advance of any action, this meant that a stoppage in the gold industry, which is the country's biggest export earner, could start on Wednesday.

 

[Unobtanium]

Median grade of the world's top 10 gold operations. Since 1998, gold grades of the world's top ten operations have fallen from 4.6 g/t gold in 1998 to 1.1 g/t gold in 2012:

 

[pmbug]

The search is on for profitable precious metals operators - Mills

The stark reality for gold miners (and their investors) is that the capital costs of construction (Capex) and the daily cost of operations (Opex) have escalated significantly.

...
A complete breakdown of costs, an “all-in” cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce. Sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold.

Scotiabank calculates “full cost reporting” (all-in cost plus development capital), at US$1,458 per gold oz for the companies it covers.

“Complete cost reporting” is full cost plus corporate taxes, it’s forecast for 2013 at an average of US$1,690 per oz. gold.

Dundee Capital Markets reported that the average all-in cash cost in Dundee’s silver equities coverage universe was $22.96 per ounce during the second quarter. Dundee’s all-in cash cost calculation includes: site operating costs, exploration, corporate G&A, interest costs, royalties, taxes and sustaining capital.

Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit.

Below is a graph and a snippet from an excellent interview Joachim Berlenbach did with The Gold Report…

...

More: http://www.mineweb.com/mineweb/content/en//mineweb-independent-viewpoint?oid=202328&sn=Detail

 

[pmbug]

... We now have 109 mining companies in our ‘club list’ whose share price has fallen by 90% or more since the heady days of 2010/2011 when the gold mining conferences were standing room only.

... any stock that is down more than 90% is most probably going to be down 100% soon enough and turning the lights off. ...

... The reason why mining companies are falling by 70-100% in the hundreds now is very simple. In our analysis, it costs over $1750 to mine an ounce of gold if you add in all the costs of running a mining company, not the published cash costs or the all in sustaining costs. The mining industry can argue till they are blue in the face that their costs are $800 or $1200/ ounce but if you only produce negative cash flow (that’s a LOSS to the non-analysts) when gold is below $1750, then it’s pretty clear in my books what is happening. ...

More: http://www.hindecapital.com/blog/the-growing-90-club-and-why-gold-production-is-going-to-go-to-zero/

 

[Aubuy]

This thread actually has something to do with gold which is refreshing. The good news is that as long as chicks dig gold so will the miners. :grin:

 

[ancona]

It is maddening to read articles about mines going dormant and so forth because of low gold prices. I can't figure out why these guys won't/can't hold back what they produce until prices get to where it becomes profitable for them to mine.

It would seem to me that the miners should be the ones controlling price, not the paper pushers, because after all, without the miners there is not gold. I can understand the whole idea of how paper prices can cause major fluctuations in speculative gold and silver vehicles, but if I were a mine owner producing a hundred tons a year, i would merely hold out for a price that would cover operations and provide for a nice profit. perhaps if enough miners got together and announced that until the paper shenanigans stopped, no one would get any gold, things would turn around.

 

[pmbug]

Output from the world's gold mines is set to hit record highs this year, disappointing bulls who are impatiently waiting for production cuts following this year's 24 percent plunge in prices.

Some gold miners have felt the squeeze of lower prices this year, and a number, including Canada's Kinross and Russia's Polymetal, suspended marginal mines and projects after a dramatic first-half price drop.

But as prices fall, others are actually increasing output to maintain revenue and profit levels. In some cases, they are targeting higher grade ore to keep marginal mines operating and generating cash, at the expense of future production.

Furthermore, several large projects put into motion during gold's 12-year rally, which took it as high as $1,920 an ounce in 2011, are coming to fruition.

"Our expectation is that we're going to see a fresh record high in gold mining output this year," GFMS analyst William Tankard said.

"What we're seeing is an ongoing response not to the slide in prices, but the decade-long stretch of fairly heavy capital investment into the mining industry that preceded it."

The world's top three gold miners - Barrick Gold, Newmont Mining and AngloGold Ashanti - all reported higher production in the most recent quarter.

For some marginal mines, firms are planning to tap better grades up front, a practice known as high-grading, which often comes at the expense of shortening the life of a project and giving up lower grade ore that could have been economic later.

African Barrick Gold, for example, re-engineered its lowest grade and highest cost mine, Buzwagi, to tap higher grades and move less material, hoping to ensure the operation generates cash.

"In the short term, when they have got flexibility, you can see companies changing the ore mix to keep themselves operating," Nomura analyst Tyler Broda said.

"It costs money to shut things down."
...

More: http://www.reuters.com/article/2013/11/20/gold-mine-output-idUSL5N0J44T720131120

 

[Unobtanium]

More: http://www.reuters.com/article/2013/11/20/gold-mine-output-idUSL5N0J44T720131120

I begin to wonder if this article was written with a bias to make people believe that there has been some massive turn around in gold production of the mining sector, whereas the data from the World Gold Council quarterly reports shows the contrary. If anything, according to data directly from the WGC's reports, this year, so far is about on par with the last couple years. Below is a graph that I have compiled based on data from the WGC:

Let's dissect a some comments from the article:

Output from the world's gold mines is set to hit record highs this year, disappointing bulls who are impatiently waiting for production cuts following this year's 24 percent plunge in prices.

"Our expectation is that we're going to see a fresh record high in gold mining output this year," GFMS analyst William Tankard said.

The world's top three gold miners - Barrick Gold, Newmont Mining and AngloGold Ashanti - all reported higher production in the most recent quarter.

The facts, from WGC quarterly reports:
First three quarters of 2011: 2139 tons
First three quarters of 2012: 2102 tons
First three quarters of 2013: 2143 tons

So yes, a record high has been hit at 2143 tons, but it exceeded the 2011 high by only 4 tons! Some record!

Now this is "somewhat" impressive that miners have done this in spite of the lower gold prices. But as seen below, one way they have done this is by tapping into the higher grades, or high-grading, which can have some serious ramifications down the road.

So I call BS on this article, not at you Bug, but at the writers of the article. Sounds like it was tailored at Madison Avenue. To the unsuspecting reader, it gives the impression that miners have their ducks in a row and are flourishing despite the low POG, when in reality they are taking short term gains at the expense of long term operation.

The pied piper is piping, and the info above is just one of many warning shots that are being fired to those that will pay attention.

Look at all the data presented by many different people in this thread; it is very hard to come to a conclusion that the mining sector is in good shape. It is my opinion that one day gold and silver will be like .22 ammo is today. One day you can get it and then, boom, "Hey why can't I get .22 ammo anymore?".

Now the dynamics between the lack of .22 ammo availability and the future lack of availability of gold and silver are different, but the effect will be the same, and most likely even more dramatic for gold and silver.

It is only a matter of time, folks.

Here is another quote from the article above:

But as prices fall, others are actually increasing output to maintain revenue and profit levels. In some cases, they are targeting higher grade ore to keep marginal mines operating and generating cash, at the expense of future production.

For some marginal mines, firms are planning to tap better grades up front, a practice known as high-grading, which often comes at the expense of shortening the life of a project and giving up lower grade ore that could have been economic later.

This is just more of the proverbial "stretching back of the gold rubber band price". Short gains now with consequences down the road. Here is some supplemental information on high-grading (only an excerpt below, but the entire article is a good read:

Ground Control to Major Tom: Reserves Are in Jeopardy
Jeff Clark, Senior Precious Metals Analyst
http://www.caseyresearch.com/cdd/gro...re-in-jeopardy

High Grading

However, there's another phenomenon at work that will conspire to lower reserves: high grading.

Many projects have both low-grade and high-grade zones. When prices fall, a company can mine the richer ore and still make money. It may sound shortsighted, but it can be the right thing to do to stay profitable and be able to survive and advance in a temporarily weak price environment. But it does impact reserves, maybe more than you realize…

When metals prices are low and companies focus on high-grade ore, the low-grade material is temporarily bypassed. It's still physically there, but not only is it not economic at lower metals prices, it may never get mined at all.

That's because some low-grade ore only "works" when it's mixed with high-grade ore. Even when gold moves back up to the price that the low-grade ore needed to be economic when mixed with the higher-grade ore, it doesn't matter, because the high-grade ore is gone. So it's not just gone legally, as per regulatory definitions of mining reserves, it may be economically gone for good.

Miners could return to some of these zones in a very high gold price environment (something north of $2,000), but that's a concern for another day. The point for now is that many of today's low-grade zones can no longer be counted as reserves.

 

[Unobtanium]

It is maddening to read articles about mines going dormant and so forth because of low gold prices. I can't figure out why these guys won't/can't hold back what they produce until prices get to where it becomes profitable for them to mine.

It would seem to me that the miners should be the ones controlling price, not the paper pushers, because after all, without the miners there is not gold. I can understand the whole idea of how paper prices can cause major fluctuations in speculative gold and silver vehicles, but if I were a mine owner producing a hundred tons a year, i would merely hold out for a price that would cover operations and provide for a nice profit. perhaps if enough miners got together and announced that until the paper shenanigans stopped, no one would get any gold, things would turn around.

I would suspect that it has something to do with the quote in the article posted above by PMBug:

"It costs money to shut things down."

I agree with your concept above, but in reality it seems that taking a mine offline for some period of time and then firing it back up is somewhat involved, complex, and costly. I can't say for sure, and I would also love to see miners give the middle-finger to the paper pushers, but it seems that is what drives miners not to do what you are suggesting.

 

[bushi]

I agree with your concept above, but in reality it seems that taking a mine offline for some period of time and then firing it back up is somewhat involved, complex, and costly.

...This, and the fact, that miners are just like most other businesses today-operating largely on borrowed " capital" day to day, and making a living from a spread between their cost of borrowing, and what they can sell to pay it back, with some profit. So if they stop the flow of spice, they cannot survive without shutting things down.

It all looks to me like it is still going to get worse, before it gets better. I'm even tempted to sell my stack and materialize some loss, in the expectation to make it up in the future (short/medium term) price drop. I'm not doing this, only because it seems too obvious, and everybody is on the same side.

Sent from my SM-N9005 using Tapatalk

 

[rblong2us]

Yes its a difficult situation.

We now know how easy it is to manipulate the pog and the current push seems to be downwards.

To sell now and take the loss makes logical sense but then thats what the shakeouts are supposed achieve.

But to simply ignore this logic and say 'fook em one day my stash will buy my dream' is where a lot of us sit.

Perhaps we need to start reassuring each other that we really should hold on.

Possibly one of the more important functions of this site ?

 

[pmbug]

I begin to wonder if this article was written with a bias ...

I think that was pretty evident from the very first sentence, however, as you rightly pointed out, the article did provide some interesting information on what mines are doing to boost production - essentially the same thing srsrocco has been warning about for a while.

Not quoted in my last post, but also included in the article:

...
Metals consultancy Metals Focus says it expects gold mine output to break through 3,000 tonnes a year in 2014 for the first time. That compares with an estimated 2013 output of 2,920 tonnes and 2012's 2,861 tonnes, according to GFMS.

Gold production could start moderating in 2015.

"That's the point when you will start to see some cost-cutting closures," Metals Focus analyst Oliver Heathman said. "Depending on the mines, they can sustain a period of high grading. The bulk of mines are still profitable on a cash cost basis at $1,000 an ounce, but not on a prolonged basis."
...

Their short term measures in going after the higher grade ore will only last for a year and a half (roughly). If spot doesn't move upward significantly by then, closures should accelerate.

 

[SRSroccoReport]

Rising Gold Costs & the Price of Oil

I see there is an interesting subject being discussed here, so I thought I might include a few points.

The reason why the cost of gold (or silver) has increased substantially is due to the price of oil quadrupling since 2002.

Brent Crude 2002 = $25.00
Brent Crude 2012 = $111.63

I get a great deal of my readers at my site ask me how could the cost of silver rise from $4-5 in 2002 to $20+ today. The reason again, is due to the increase in the price of oil. This is also true with the price of gold.

Many believe the rise in the price of oil is due to either manipulation of the oil market or by monetary printing. Even though these may take a small degree of blame, the majority of the reason for the huge increase in the price of oil is the decline of Net Oil Exports.

Available Net Oil Exports (ANE) peaked in 2005 at roughly 40.7 mbd (million barrels a day) and declined to 34.4 mbd in 2012. ANE are the oil exports available to the remaining 155 oil importing countries of the world when we subtract the top 33 net oil exporters consumption including China & India.

The work of the Land Export Model which figures the decline in Net Oil Exports was developed by Jeffrey Brown. I have had several email exchanges with him on several equally interesting oil data points.

Saudi Arabia is one of the top 2 oil producers in the world. Both Russia & Saudi Arabia jockey for the top spot. Even though Saudi Arabia produces 10+ mbd of oil, it is now the 5th largest consumer of oil on the planet. Thus, its domestic consumption keeps rising while its overall oil production stays close to 10 mbd.

At last count as per the IEA data, Saudi Arabia is consuming over 3 mbd of their oil. So their net oil exports are now less that 7 mbd. This is s stark contrast to what the Kingdom was exporting in 1980:

1980 Saudi Oil Production = 10.3 mbd
1980 Saudi Oil Consumption = 0.6 mbd
1980 Saudi Net Oil Exports = 9.7 mbd

So, here we can see that even though the Saudi's are able to produce today about the same as they were in 1980, the net oil exports are 2.7-3.0 mbd less than they were 32 years ago.

Each year that overall global oil production remains the same, consumption by the top 33 net oil exporters increases. So, it only gets worse from here for the rest of the world. Shale Oil in the US is a temporary phenomenon and will more than likely peak and decline by 2015-2016 at the latest.

ENERGY IS EVERYTHING... that is why we are seeing so much trouble in the economic and financial markets.

For those who are tempting with the idea to sell gold and silver... I can empathize, however... peak oil-energy will make gold and silver some of the best stores of value going forward.

Even though Real Estate may seem like a safe place to park ones money as many of the extremely wealthy are doing... this value will evaporate when peak oil hits and declines.

The cost to mine gold right now is sort of leveling out because the price of a barrel of Brent is now $109, down from an average of $111 in 2012. If the price of oil increases to say $130-$150, then we are going to see serious cost inflation in the precious metal mining sector.

I will be putting out my break-even for the top 12 silver miners in the next few weeks at my site, SRSroccoReport.com. I will be adding the top gold miners shortly.

The important thing to understand in my opinion is that the gold and silver miners are forced to CUT THEIR NOSE OFF TO SPITE THEIR FACE. They are cutting back on a great deal of mine projects and exploration. This has had an impact on FREE CASH FLOW in Q3 as many have turned positive but the negative impacts will be felt in the next several years.

Lastly, everything in this market is like a huge freight train... it takes time for the train to get up to speed or to stop. I see much higher values for gold and silver in the future. However, the current market conditions have made many precious metal investors lose confidence.... I completely understand.

But.... anything worth while needs a great deal of patience.

Steve

 

[pmbug]

...
The important thing to understand in my opinion is that the gold and silver miners are forced to CUT THEIR NOSE OFF TO SPITE THEIR FACE. ...

This is the perfect summation for what's happening. I'm looking forward to your break-even reports.

 

[ancona]

Ditto what the 'Bug said.

BTW, welcome to our little corner of the asylum.

 

[rblong2us]

and a big welcome from me Steve

Ive followed you on Turds site for a long time and read your stuff whenever it is referenced.

Thank you for taking the time to research and share your findings with us.

 

[Unobtanium]

Welcome to the Bug Steve.

Thanks for your comments, and I do agree heartily with your comments about the POG being strongly tied to energy costs.

What are your thoughts about the POG also being tied to the average ore grade in decline over the past many years?

We then have two forces on the POG increasing - energy costs increasing and average ore grades declining, meaning more energy expended per ounce of gold mined.

Other factors are also bound to become stronger factors also, such as extreme fiat printing and an ever increasing demand for physical from China and India (although Indian demand is presently being curbed through governmental controls).

The one curve that the POG seems to follow closely in parallel is the US Debt ceiling, but I am not sure if that is happenstance, whereas the real driver is the cost of energy as you mention.

I would love to see a curve of the cost of oil overlaid with the price of gold for the past two decades. I will see if I can get one posted if I get some time.

I think we all agree that crunch time could be coming soon with the POG if things keep proceeding on the track they are now.

Cheers,
Unob

 

[benjamen]

Welcome to the Bug Steve.

Thanks for your comments, and I do agree heartily with your comments about the POG being strongly tied to energy costs.

What are your thoughts about the POG also being tied to the average ore grade in decline over the past many years?

We then have two forces on the POG increasing - energy costs increasing and average ore grades declining, meaning more energy expended per ounce of gold mined.

Other factors are also bound to become stronger factors also, such as extreme fiat printing and an ever increasing demand for physical from China and India (although Indian demand is presently being curbed through governmental controls).

The one curve that the POG seems to follow closely in parallel is the US Debt ceiling, but I am not sure if that is happenstance, whereas the real driver is the cost of energy as you mention.

I would love to see a curve of the cost of oil overlaid with the price of gold for the past two decades. I will see if I can get one posted if I get some time.

I think we all agree that crunch time could be coming soon with the POG if things keep proceeding on the track they are now.

Cheers,
Unob

WTI Crude Oil in Gold grams per Barrel since 1950:
http://pricedingold.com/charts/Crude-1950.pdf

 

[rblong2us]

the POG/ WTI chart makes gold seem to be near its historic mean ........

.

 

[Unobtanium]

Here is a graph that shows the historic gold and oil prices since 1968. The second graph is an additional view of the gold/oil price ratio.

If ore grades continue to decline, then it makes sense that eventually the cost to mine gold will eventually have to rise at a faster rate than the rate of increase of the price of oil (i.e., the price of gold will begin to pull away, on the upper side, from the price of oil graph seen below).

 

[ancona]

It's interesting to see the relationship over time like that. I wonder how the price of silver and gold compare to food on the same timeline?

 

[Unobtanium]

Here is more info on high-grading at mines that is currently ongoing in the presence of low gold prices:


http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=218438&sn=Detail

Why low gold prices first lead to production rises before falling

The gold price goes down, mines are closing yet global gold production is rising. Surely a contradiction? What is the reason?
Author: Lawrence Williams
Posted: Monday , 18 Nov 2013

LONDON (Mineweb) -

Investors may become a little puzzled when they see reports prepared by respectable analytical bodies that suggest that annual mined gold output this year is likely to beat last year’s total. Surely, continuing low gold prices, with perhaps half the world's mires at or close to breakeven or below on an all-in-sustaining costs basis have led to mine closures (we have already seen some) and a slowdown in expansions and in new projects being developed?

All the above is true! Ultimately a prolonged period of low gold prices will indeed likely see a fall in global output of the precious metal. Mines will close and new projects will be put on hold, but it would have taken time for these to come on stream anyway Natural wastage will take effect as old mines close through depletion of reserves while the new project delays will mean the production from the closures will not necessarily be replaced.

But short term – and by short term I am looking here at a one to two year period , or perhaps even longer – gold production will indeed rise. The rises are already set in place. Those big new projects which have been built over the past decade are still coming on stream, while those companies with operating mines, which have the capability to do so – mainly the larger operations - will just push higher grade ore through their mills at the existing milling rate in order to preserve revenues, although in many cases at the expense of shortening mine life.

In this way, at least the operation can carry on working without draining corporate cash resources. The mines which will close, though, if the gold price slump continues, will largely be at the lower end of the gold production table and will thus not lead to a big enough fall in production initially to counter the additional output from high grading and the new mines already under way.

For gold producers, nowadays under strong pressure from institutional investors and shareholders to cut capital and operating costs, it also looks good in company financial and production reports in that higher gold output without having to add new mining and milling equipment, leads to a reduction in unit costs and an improvement in free cash flow.

 

[Unobtanium]

I have learned a lot during the course of this thread. Let's take a look at the original post, and then tie it in to the oil/gold graph above.

Miners will need $3,000 gold price to be profitable, WGC head says
Submitted by cpowell on Tue, 2012-05-15 13:42. Section: Daily Dispatches
From Reuters
Monday, May 14, 2012

Sharp increases in mining costs mean gold will need to reach $3,000 an ounce in five years for the industry to stay profitable, World Gold Council chief executive Aram Shishmanian said on Monday.

With the gold/oil ratio at roughly 15:1, if miners need $3000/oz to be profitable in 5 years, then, with all other things being the same, that means that they are anticipating a rise in the price of oil to about 200/bbl over the next 5 years. Ouch and ouch.

 

[rblong2us]

Renewables, LNG, shale gas and coal are all being developed to cover the reality of peak oil. Yes we did hit peak oil and yes technology did ride to the rescue.

We are currently using more energy than we did prior to the 08 collapse in world trade and this is being interpereted as a worldwide recovery.

( sorry I cant find the article where i read all this but i think it was from one of the old Oil Drum crew ...)

The price of oil is effected by the availability of these alternative sources and I reckon we can realistically expect energy costs to remain fairly stable in the near term.

So if the POG is to go up, something else has to be the driver )-: