LAWRIE WILLIAMS: Ill wind. Gold price falls in USD but still positive for many nations

Seven out of the world’s top 10 gold producing nations actually saw the gold price rise over the past year, and in one other (Australia) the price fall was virtually negligible – it’s an ill wind that blows nobody any good.  Over 2015 the US Dollar Index rose by just under 10% - exceeding that increase shortly before the year end before coming back a couple of points.  In US Dollar terms the gold price fell 11.4% over the year so one could say that the fall in the gold price roughly correlated to the rise in the dollar, although in truth the dollar ‘rise’ was more of a fall in other currencies given the US economic recovery – on which the ‘rise’ will have been based – is far from as positive as the US Fed,  the US Administration and much of the mainstream media would have us believe.

The table below sets out the change in the gold price in the domestic currencies of the world’s top 10 gold producing nations.  Among these, only the US and China saw anything that could be described as particularly painful for their domestic gold miners while Brazil, at the other end of the scale, actually saw the gold price rise over 30% in the Real – the currency in which the bulk of its miners’ costs are incurred.  Thus the global gold mining industry outside the US and China is probably in a far better shape than much of the media, and many analysts, are telling us. 

Even in North America one only has to go across the border north to Canada – the world’s seventh largest gold producer to see that in Canadian dollar terms the gold price has risen over 5% over what the media sees as a disastrous year for gold.  Over the southern border, Mexico – the world’s 8th largest gold producer in 2014 to see almost a 4% rise in the gold price in the domestic currency over the year.

Rank

Country

Gold output 2014 (tonnes)

Gold Price change over year (%)

1.

China

462.0

-7.4%

2.

Australia

272.4

-0.8%

3.

Russia

266.2

+10.5%

4.

USA

210.8

-11..4%

5.

Peru

171.0

+4.5%

6.

South Africa

167.9

+18.5%

7.

Canada

151.3

+5.5%

8.

Mexico

110.4

+3.6%

9.

Ghana

104.1

+4.5%

10.

Brazil

90.5

+32.0%

 

EURO

 

-1.3%

Source: 24hgold.com, lawrieongold.com

At the foot of the table we have also noted the performance of the gold price in the world’s current second most important reserve currency – the Euro – and it has fallen only 1.3%.  In market terms a virtually flat outcome.

The gold price has come down around 7% though in the domestic currency of the world’s largest gold miner – China – but here the Chinese government has intimated it will let the Yuan drift downwards against the US Dollar (it is already doing so) to which it was previously tied.  The Dollar rise, and a corresponding rise in the Yuan, has been impacting on the competitiveness of Chinese exports, and the fall in the Dollar gold price was also damaging the profitability of the country’s gold mines which China wishes to protect at almost any cost (See: Goode insights on China gold).

What all this suggests is that the gold miners in most parts of the world are not threatened by the gold price fall as much as many would have us believe.  This doesn’t mean that global gold production will not, at long last, begin to tail off.  What the fall in the gold price has done is to cut off finance for most new projects and major expansion programmes.  Mining involves working depleting assets and even under rising prices older mines inevitably shut down through coming to the end of their resources and declining grades.  The lack of availability of new project finance means these are less likely to be replaced.  Major projects which were already so far down the production pipeline when the gold price began to fall that they were continued are now virtually all in full production so new capacity is just no longer coming on stream.  At this stage a production decline starts to become inevitable, although it will be relatively small. 

Even so this will add to the overall likely fall in supply with that from other sources – notably scrap and from the gold ETFs – also stuttering this year.  This combination should be positive for gold fundamentals although overall price control still remains firmly in the hands of the U.S. paper gold market, but one suspects this overall control may be drawing ever nearer a close as gold inventories in the West are falling, and demand – mostly in the East appears to be on the rise.  The opening of a price benchmarking system in China – now supposedly coming into force in April – could also see price control moving.

Gold has also been out of investor favour as better returns have been perceived to be coming from general equities, although these were in many cases flat to lower over 2015.  But the opening day of trading in the New Year saw a massive plunge (7%) overnight in the Chinese stock markets, followed immediately by other Asian markets, and spilling over to the European stock indices on opening today.  Stock market volatility is creating investor doubts and these could spill over into gold in its traditional safe haven role.  The Saudi execution of a prominent Shia cleric is creating massive tensions in the Middle East which could lead to the continuation of the proxy wars between Iran-backed Shias and Saudi-backed Sunnis in Syria, Iraq and Yemen is just creating more instability in this most volatile of regions and will also likely boost the oil price too.

2016 has started worryingly in terms of global geopolitics and finances.  Maybe it will prove to be the turning point bringing the gold price decline to an end.

04 Jan 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com