Drop in Gold Price: A Blessing in Disguise?
Gold, which is a substitute to the U.S. dollar as a global currency, does not tend to do well when the U.S. (and the US$) performs better than the rest of the world – which is exactly what we are seeing now. We experienced a similar phenomenon in the global recessionary phase in 2008, when gold dropped from $1,000 to approximately $700 per oz, as capital flowed to the U.S dollar. Don’t expect gold prices to decline much from current levels, as global economic concerns still persist, and capital preservation is still one of the major requirements for investors these days – factors which are very positive for gold.
The average cash-cost of juniors is currently about $700 - $900 per oz. Cash cost is defined as the sum of all operating cash costs net of revenues from the sale of by-products. The average actual operating cost, which is normally higher than the cash cost, is currently estimated to be about $1,000 - $1,200 per oz. This figure is approximately 2-3 times five years ago, when is was about $400 - $500 per oz. Also remember, gold was just $250 - $300 per oz in the early 2000s, and companies were profitable then. Although the drop in grade of deposits, and rise in energy and labour costs contributed to the increase in operating costs, Gold’s 13 year bull-run has made some managers complacent, and less focused on efficiency and cost. I see this recent drop in prices as a blessing in disguise. It will force producers to be more conscious about money, try to streamline their operations and cut costs, and thereby make companies fundamentally stronger. |
