Demand for Gold Mixed


 Gold is on the mind of many gold strategists. Some are predicting continued price increases, while others are not that optimistic, since gold prices are on a downward slide.

The London PM Fix prices declined from a high of $1,694 per ounce on Jan. 2 to $1,598 by March 28, according to historical data on the Kitco website.

A number of gold demand reports indicate that investors and hedge funds have been exiting the gold market, depressing the price of gold. However, others call the decline in the gold price a technical correction, which generally occurs after significant price increases.

“I think we could be in for a technical correction. Gold prices pretty much ranged in 2012, finding solid support at the $1,550/ounce mark. … If we see price close below $1,500, who knows how low price may fall,” according to an entry on Seeking Alpha’s Instablog.

Varied Demand for Gold

“Demand for bars and coins tapered off in 2012, shrinking by 12% to US$67.4bn,” according to a 2012 Gold Demand Trends report, released by the World Gold Council (WGC) in February.

Taking advantage of rising gold prices, a number of investors divested their gold so they could still earn a profit before gold prices declined too far.

In 2012, the demand for gold declined by 4 percent when compared to 2011, while the value of gold rose between 2003 and 2011 from $3.6 billion to $76.6 billion.

“The long term downtrend in jewellery and technology volumes, against a backdrop of a twelve-year bull run in gold prices, has seen their share of total demand eroded,” the WGC report suggested.

Indian bullion dealers, jewelers, and individuals increased their gold purchases before the end of 2012, fearing that duty on gold could rise between 4 percent and 6 percent.

“The value of annual demand [by Indians] reached Rs2,475bn, up 6% from 2011. Indications are that the rush to avoid the increase in gold import duties continued in the opening weeks of 2013, prior to the government’s confirmation of the increase on 21 January,” according to the WGC report.

Also, the world’s central banks accounted for 12 percent of total gold purchases in 2012, 2 percent higher than purchases in 2011, increasing global gold reserves by 1,100 tons.

“Total net purchases [of gold] by central banks of 534.6t exceeded 2011’s already strong total and signalled a return to levels of buying last seen almost 50 years ago,” the WGC report states.

Gold Mining Costs

“Since many of the gold miners have now released their 4Q 2012 and full-year earnings, it is time to start calculating the true cost of mining each ounce of gold, and I will assure you, it is not close to the ‘cash costs’ that are reported by the miners in their quarterly statements,” a Feb. 26 article on the Seeking Alpha website states.

Mining companies, traded on the world’s stock exchanges, provide financial statements to the public, giving an unaudited look at their cost to mine one ounce of gold, called the “cash cost.”

The formula for calculating the cash cost includes the operating cost of the mine, the processing cost, salaries, and any other cost that is incurred, which is then divided by the quantity in ounces of gold produced during a given period.

“This measure is completely misleading, and selectively reports costs without really giving investors a true picture of the cost it takes to produce an ounce of gold,” the Seeking Alpha article suggests.

Cash Cost Highlights

In their 2012 annual report, Canadian-based Barrick Gold Corp. states, “All-in sustaining cash costs were $945 per ounce and total cash costs of $584 per ounce were the lowest among the senior gold producers.”

All-in sustaining cash costs include all direct and indirect operating cash costs that are expanded when producing metals, including mining, processing, third-party refining expense, general and administrative expenses, royalties, and mining production taxes less depreciation, amortization, and depletion. The total cash cost refers to what was paid for in cash.

For example, for Barrick’s North American operations, the total cash cost per ounce was $500, while for Cortez, which is located in Nevada, the total cash cost was $282 per ounce of gold. The total cash cost for the three South American operations was $467 per ounce.

“Going forward, Barrick’s cost structure is expected to benefit from combined average annual production of about 1.5 million new ounces from Pueblo Viejo and Pascua-Lama at average all-in sustaining cash costs of $250–$350 per ounce and average total cash costs of $100–$200 per ounce,” the Barrick annual report states.

Another Methodology

“To calculate the true costs to mine an ounce of gold, we use the total costs reported for the quarter, and then we subtract gains or losses on derivatives—since these really have nothing to do with running the company,” the Seeking Alpha article states.

Secondly, the author of the Seeking Alpha article includes by-products in his formula, such as copper, silver, and zinc, and uses the same formula year-round for quarterly and annual statements to ensure that a one-time increase in the by-product does not affect the year-to-year comparison.

Thirdly, the mining company should include write-downs in their estimate, because such accounting practices affect the real cost of production. To ensure a more accurate estimate, one uses the end-of-year write-down and assesses a quarter of that number to each quarterly cash cost. A write-down is a downward revision of the book value of an asset.

That is not all regarding write-downs, as write-downs also represent a tax benefit, given the loss to the company. The author estimates a 30 percent flat tax rate. This tax benefit should be removed because it represents a gain to the company.

Barrick “is one of the largest miners in the world and has significant economies of scale, but still is only able to produce gold at $1300 per ounce. … Investors who are looking to see gold drop below $1000 per ounce are probably living in the past. The costs of production make mining a losing proposition at anything below $1300 gold,” the Seeking Alpha article suggests.

Cost of Agnico-Eagle Mines

“Total cash costs for the fourth quarter of 2012 were $769 per ounce versus $671 per ounce for fourth quarter 2011,” Canadian-based Agnico Eagle Mines Ltd. (AEM) states in its fourth quarter announcement.

Using the same methodology for AEM as for Barrick, the author of the Seeking Alpha article suggests a total cash cost of $1,384 per ounce of gold for fourth quarter 2012 and $1,343 for the full year 2012. The total cash cost per ounce of $1,527 for fourth quarter 2011 could possibly represent cost-cutting efforts by the firm.  

“For investors interested in gold as a commodity (GLD investors take note), AEM’s report echoes what we have seen across the gold mining industry—increasing production costs and little to flat production growth. … As miners try to limit cost increases, production may suffer. This may be bullish in terms of the gold price,” the Seeking Alpha article states.




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