Gold Production Down: What Does This Mean for the AUD Gold Price?
With recent record high gold prices, you might expect miners to be hastily churning out ounces of the yellow metal.
Spurred on by concerns of a global recession and quantitative easing, gold has gone on to breach the $2,700 mark a few times since the beginning of the year. It is currently trading at $2,593.
But miners appear to have taken a different approach.
Gold production in Australia slumped by 12% in the first three months of this year.
The reason: miners are being tempted to focus on less attractive geology.
AUD gold price, source: Tradingview
Reduction in both grade and tonnes
Talking to the AFR, Surbiton Associates geologist Sandra Close said there had been sector-wide reduction in both grade treated and tonnes treated in the March 2020 quarter.
In times of high gold prices, miners will often focus on sections of geology with less gold.
This is because the price eventually falls again, and therefore these areas may not be economically viable to extract.
Total output has fallen 10 tonnes since the previous quarter, from 87 tonnes ending 2019 to 77 tonnes in the March quarter 2020.
So, is this a sound strategy?
There are a few things to consider here, including where the price of gold is headed (which I’ll get to shortly).
Firstly, wouldn’t it make more sense to pump out high-grade gold while the going is good and improve profit margins?
One of the world’s top gold investors, Joe Foster agrees with that sentiment.
He went on record in August 2019 saying that he did not want miners to target lower grade geology while prices were high.
Speaking to the AFR, Mr Foster said:
‘In any mine you design you want maximum cash flow as soon as possible. So, it kind of goes against basic economics to keep your best ore in the ground waiting for lower gold prices.’
A second point to consider is there could be cooling demand for gold — which might explain why the price has been tracking sideways for the past two months.
If you’re considering purchasing gold during this lull but are unsure how, then check out our guide, which shows you the easiest way to buy, sell, and store gold. It’s completely free, so download your copy here.
Last week I discussed the oversupply of physical gold in the market. Traders couldn’t get rid of the stuff fast enough.
This briefly spurred concerns of a similar fiasco occurring when oil stockpiles surged, plummeting the price of crude.
Of course this hasn’t happened yet, and it could be unlikely, but it is something to keep in mind.
The almighty Australian dollar
Australian denominated gold prices fell below $2,600 an ounce last week for the first time since March.
Though gold prices also fell in US dollar terms, the fall here in Australia has been helped along by our strengthened local currency.
But the Aussie dollar could be in for another fall if demand for our commodities remains weak.
China is one of the biggest buyers of Australian commodities.
They need our resources to fuel their massive industrial machine.
Take a look at the graph below. It show China’s production index (PMI) since 2012.
Anything above 50 indicated an expansion in activity.
China PMI, source: Trading Economics
As the fallout from the coronavirus pandemic continues, China has seen new export orders decline the most since December 2008.
It’s a two-step process.
If less people want China’s goods, then China will want less Aussie commodities.
Since the AUD is heavily influenced by commodity prices (people buy AUD in order to purchase our commodities), we could see our dollar weaken again.
Meaning bad news for those buying online from overseas, but good news for those invested in gold and gold miners.
You have probably noticed that gold and the weak Australian economy have become hot topics lately — and for a good reason. Investors are taking appropriate steps to protect themselves from a looming recession. If you’d like to know more and discover the three steps you can take to protect your finances, download our free report on how to recession proof your wealth. You can get that here.
And if you want a forward-looking report on the things that could drive the price of gold, you can find the in-depth report here.
For The Daily Reckoning Australia