Why are gold mines down?

The price of gold has risen by over 25% this year, yet mining stocks are in the doldrums. Why?

“It is something everybody is thinking about at the moment”, says the manager of one of the largest gold funds.

Prices of gold and mines have diverged in the past but the mining stocks have always rebounded.

Past performance, however, is not necessarily a guide to future performance.

Although this article lists several people as saying that gold equities ‘should’ rebound, the key sentence concerns the “lack of growth prospects for the industry.”

“While some companies… are planning a substantial production increase, the industry as a whole struggles even to maintain production at current levels… “

This means that the costs of mining gold are approximately the same as the value of the gold once extracted and purified, even at the dizzy heights now being reached for gold.

The major costs of gold mining are “energy, steel and labour”. It seems unlikely that labour costs have risen dramatically, which implies that costs of energy and steel are expected to rise in line with the cost of gold (as is already happening).

As the chief executive of the fourth-largest gold miner says in the video interview with the FT:

“[Despite an increase in market demand for gold] we’ve had a gold price that has risen from 250 to 1800 dollars an ounce in just over 10 years, and production is flat or hardly up at all. And that tells you how difficult it has been for the producers to respond to these higher prices.”

If it is that difficult to raise production now, it is not going to get any easier in the future. It may be true that a lot of people are switching into buying gold mining equities. But unless the gold price  They may be surprised.

Implications:
Gold miners have found it “difficult” to raise production, despite a seven-fold increase in the price of gold over the last ten years.
Further rises in the gold price may cross a magic threshold, which changes the economics of gold mining. But it seems unlikely that any rise in the gold price will change the economics fundamentally, even if it passes the $2,000/ounce price they talk about. Especially as energy becomes the new currency. (Which implies any increase in gold sees a commensurate increase in energy prices, which means it remains difficult to mine gold profitably.)
In which case we may (bizarrely) be facing peak gold, as well as peak oil.
Which means it’s time to sell the gold mine. And Barrick’s April acquisition of a copper mining company could well be tacit admission that there are no growth opportunities in gold. Except that copper has just fallen to a 10-month low.

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