A reader wrote in asking about the relationship between mine supply and the price of gold. (Note that questions are lightly edited for grammar and clarity.)


Recently, I heard somewhere that the average cost of pulling gold out of the ground across the entire mining space is around $1,100–$1,200. That was said in the context of the commentator suggesting that gold really can’t go down as far as trend lines might suggest, even if the US dollar continues to strengthen.

He didn’t say it, but there is no Fukushima-equivalent supply dump out there depressing gold to ridiculous levels below the cost of mining.

First, remember that not all companies report costs the same way. Even those that do report something like the World Gold Council’s all-in sustaining cost (AISC) metric don’t all calculate it the same way. And remember that AISC isn’t really “all in,” in that it excludes taxes and other items between it and the bottom line.

That said, the $1,100–$1,200 range looks high to me for AISC. The latest reported AISC for the 10 largest gold miners yields an average of $930.94. Smaller miners won’t have the same economies of scale, but some run very high-margin, single-mine shops. Others are losing a lot of money.

Your figure might be about right for the actual average total cost.

But while gold prices below the average cost of production will shut mines down, it’s a mistake to believe that will drive prices up.

Two reasons:

  1. Gold is not like other commodities. Its price is highly insensitive to the balance of supply and demand. Very little gold is used up by industry; by far, most of the gold ever mined in history still exists in purified form in vaults, safes, and in jewelry all around the world. This gold is highly liquid. It can and does come on to the market under the right circumstances. This supply of gold so dwarfs what comes from mines that mine supply has no visible impact on gold prices.
  2. Gold is a safe-haven asset. People will pile into gold when they fear economic uncertainty, or chasing momentum when it’s on a tear. This has nothing to do with mine supply. We’ve seen many times that supply can increase at the same time prices are rising.

Silver is slightly different, in that it does get used up in industry. But despite this, its price moves within a range of gold’s price, almost without regard to supply and demand. This is not so for other precious metals like platinum and palladium, which are mostly consumed as industrial metals. That’s bad news for both of these, as their main use for pollution control in gas- and diesel-burning cars is on the path to extinction. It’s good news for silver, which is facing massive new demand from the new energy paradigm.

This brings us to your Fukushima comment. I have never seen, read about, or heard of a single event that triggers wholesale dumping of gold on the market without regard to price. In my career (and those of my predecessors), there have been times when safe-haven demand declines, and so does the price of gold—dramatically. So, yes, it could happen.

But in our world of ever-rising geopolitical and economic turmoil, this is not something I fear.

Short-term fluctuations aside, I remain a gold and silver bull.

Monday, September 10, 7:39pm, EST, 2018