XAUAUD Chart: Two Thoughts on Aussie Gold Stocks and AUD Gold Price
Today, I share two thoughts on Aussie gold stocks and the current gold price in Aussie dollar terms.
You can see XAUAUD over the last three months below:
You can see a steady rise in the gold spot price up to late march, a period of sideways movement as stimulus measures were rolled out, then a sharp spike, and now we are in a holding pattern again.
Thought #1 on the current gold price
This particular titbit I picked up from an old 2018 Seeking Alpha article on the role of energy or fuel in gold mining:
‘Data on direct energy costs in the form of fuels and power is relatively easy to find. It becomes obvious that gold mining is energy intensive when looking at the direct energy exposure, that is the fuel and power consumption of gold producers. Even comparably simple open pit mining consumes a lot of fuel for trucks and excavators and underground mining consumes electricity for cooling in addition to that. The processing of the gold ore is also highly energy intensive. Most large gold mining companies report these direct energy costs in one way or another. Typically, these reported costs are somewhere around 15-25% of all-in operating costs at current energy prices.’
So, if we put aside possible Aussie gold mine closures due to the COVID-19 crisis for now (and FIFO arrangements), then a picture emerges where operational costs could come down in a significant way.
Russia and Saudi Arabia are still figuring things out, but with many countries in lockdown, it’s hard to see a significant uptick in oil demand for now.
It takes a lot of energy to run a gold mine and fuel contracts play a role in their AISC numbers.
Gold mining could get cheaper. Profitability for Aussie gold stocks could increase.
That’s the punchline.
Thought #2 on the current gold price
This one’s to do with interest rates and their impact on inflation.
I quote John Butler via Kitco:
‘You have to ask yourself the question ‘is the nominal price of gold really that meaningful?’ I’m not sure it is, because if you look at gold deflated by the CPI, or a stock market index deflated by the CPI, or for that matter a credit index deflated by the CPI, and you start comparing gold to these other traditional stores of value, actually, gold arguably looks cheap.’
The RBA has struggled to keep inflation in the target range.
Now with negative rates on the horizon, it is possible they may over-egg things.
What happens if the economy is stagnant, and then inflation actually shoots up past the target range for a sustained period?
Butler goes on to talk about what happened to gold prices in the period after ‘stagflation’ in the US.
Hint: they went flying up.
For The Daily Reckoning Australia