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Throughout much of 2013, there has been a lot of talk about a developing crisis in the gold mining world, and its impact on the gold market. Basically, it breaks down like this: gold prices have fallen, and the cost to mine gold has increased. Therefore, gold mining and production is becoming less profitable; the mines will close, and gold will become scarce.

However, there are a few factors at play not mentioned in this scenario. First, all mining companies have different costs, and the “floor” for mining gold will vary. For some mining companies, $1,000 an ounce is still a profitable price for mining gold. For others, anything under $1,400 is a loss. Second, for many mining companies, it makes more financial sense to keep mining, even at a loss, than to shut down altogether. A lot of time, money, and equipment has been invested in the mining business, and from a bigger picture, it makes more sense to work through a down period than to close production.

While it’s true that the price of gold has fallen significantly (about 25%) in 2013, the 12 years preceding this one have all seen a yearly gain. Therefore, for mining companies (many of which have been around for a while), the gold price has worked in their favor for 12 of the past 13 years. From a long term business sustaining perspective, things have been going fine, and this year simply has not been as profitable as the 12 before it. In other words, adapt to the market and move forward.

Mining companies have been able to cut business costs in response to the reduced gold price. For example, in Q2 2013, gold mining companies had an all-in sustaining cost of $1,187 per ounce, but in Q3, that number was reduced to $1,006. This $181 (15%) reduction in all-in sustaining cost allowed many mining companies to profit, despite the lower market value for the product they produced. For some companies, margins have actually increased in the last half of the year.

As to the “crisis” in the mining industry, a more accurate scenario may be this: gold prices have fallen, but so have mining costs. Therefore, gold mining output is steady, if not growing in some cases, despite gold’s price performance, and the price of gold is minimally (if at all) affected by the mining production numbers.

2013 is looking to be a record breaking year in total global gold production. If there was truly a crisis, production numbers would be less. Furthermore, 2014 is set up to break this year’s record. As a result, it’s clear that gold is not going away. We don’t know how 2014 will shape up, but we do know that despite a down year in the price of gold, the precious yellow metal will continue to be mined and sold to investors at a low cost, until the market rebounds and the price goes up again.

 

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