At a time when many talking heads on TV are focused on the dwindling demand for paper gold – based mostly on the observation of falling spot prices – there is much more relevant things to say about other parts of the precious metals market.
All of the weak hands are leaving the exchange markets when prices fall but we are still seeing increased interest in physical gold and silver. Demand for bullion is actually growing as evident by sold out supplies and increased premiums. But that’s just the demand side.
We’ve touched upon the supply side briefly before – and we’ll look deeper into this area in coming articles. In this one we’d like to shed some light on the gold production break even cost.
Many gold miners face serious challenges today as the gold production cost is relatively high. Mostly as a result of bad acquisitions, where overspending have left companies with way too much debt to service. This puts them in a position of high dependency in relation to the current gold price level as well as access to new capital. Even though the acquisition target still may have been a valid object – overspending have left the miners in a vulnerable state.
With an ever increasing price of gold, as we’ve witnessed for the past 12 years, it has been easier to justify an increasing break–even level price for production. As the spot price have risen so has the possibility to raise the all-in production cost.
Ever since the summer of 2011, when the gold price started its downward move, the situation for the miners have become more and more precarious. At an $1800+ per ounce price many miners were fine – at sub $1250 per ounce most miners aren’t.
In fact, the $1250 level is considered a watershed – the general break-even level for producing gold. Today, we are just below this level, which means that most miners are producing gold at a loss. This will eventually lead to bankruptcies.
A shake out in the mining sector will mean that less gold will be produced. Less gold produced will mean increased prices if demand remains constant. As we’ve discussed before there is a plethora of reasons for why demand should increase going forward – implying significantly higher prices for gold.
Gold miners are not in a unique situation though. Many platinum, palladium and silver miners are also in trouble. Physical demand as well as industrial demand is increasing while supply is dwindling.
For gold miners specifically, the often mentioned break-even level of $1250 may not accurately describe their situation. When one counts the “all-in” cost of exploration, production etc. the real number is, according to some estimates, closer to $1600. This means that most miners have been loosing money for quite some time – ever since the summer of 2012.
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