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Gold mining, movement in gold prices and operating performance of gold players

In the midst of global economic uncertainty caused by several negative factors like Brexit vote, negative interest rates and lately the slowing of the US economy (in the second quarter of 2016). The so-called “safe-haven” the yellow metal is gaining lustre once again, given the inverse relationship between economic confidence and gold prices. All these new developments have pushed gold prices upward since the onset of 2016, the prices increased from $1,060 per ounce in January to $1,342 per ounce in July.

The decade from 2002 to 2012 saw gold prices jump by ~17% (CAGR), from $347 per ounce in 2002 to $1,658 per ounce in 2012. Probably, gold is the only metal which witnessed a continuous upward trend in its price (inclusive of the economic recession of 2008). This decade-long upsurge saw a correction in 2012 when Fed started discussing about tightening the monetary policy and dollar showed signs of strengthening, implying an improvement in economic conditions. A subdued sentiment, supplemented with weaker consumer demand in the two major nations, India and China, and an outflow in major Gold ETF’s worldwide, further, added pressure on the yellow metal. It started with a reverse slide from then on. The gold price fell from its peak of $1,726 per ounce in November 2012 to $1,060 per ounce in December 2015.

While gold lost its sheen during the period 2013 to 2015, gold miners too lost their business attractiveness. The share prices of key players plummeted in the range of 25% to 45% during this period. Furthermore, the decline in gold price directly impacted the per unit revenue of gold miners, which on an average dipped by ~10%. In response to the situation, companies attempted to reduce their costs, so that the impact on margins can be minimised to the largest possible extent. AISC cost per ounce sold was cut by ~7% from 2013 to 2015 (average based on the players listed in the chart below).

Moreover, apart from reducing their sustaining cost structure, companies also slashed their investments in future projects. The chart below depicts the decline in all-in sustainable costs for some of the key gold miners. 

The recent upsurge in gold prices during the first two-quarters of 2016, assisted by the efforts to cut costs provides a ray of hope to the miners as their near-term realisations witnessed improvement. For the continuity of an upswing in prices, one of the key factors would be the growth in actual physical demand from the major consumption hubs, India and China, over a long term. Both India and China account nearly half of the total demand for gold, globally, primarily for investments and jewellery.

In the short-term, however, issues like low demand for paper gold, fluctuations among broader macro-economic factors, problems in the EU region and monetary policy stance by the FED, ECB and BoJ, amongst others, might continue to seep in a good amount of volatility in the commodity while also casting its mercurial nature on the major market players.

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