Futures & Commodities

Lower Australian dollar helps gold prices Down Under

This Aussie miner sees gold margins at record high
This Aussie miner sees gold margins at record high
Why this miner is switching to gold from nickel
Why this miner is switching to gold from nickel
Why you should buy miners right now
Why you should buy miners right now

The prospect of a strengthening greenback is currently weighing on spot gold prices, casting a gloomy shadow over bullion producers. Except in Australia.

Down Under, the price of the yellow metal in Australian dollar terms is trading around A$1,700 per ounce, levels not seen the global financial crisis. The bulk of Australian gold miners pay operating costs in the local currency so a depreciating exchange rate acts a boon for them.

Divergent monetary policies are a key factor.

The Reserve Bank of Australia's decision to slash interest rates to a new record low of 1.75 percent earlier this month sent the local dollar spiraling lower against the greenback, hitting a fresh three-month low of $0.7145 Tuesday following dovish commentary from Governor Glenn Stevens.

Meanwhile, the U.S. dollar is expected to climb higher after minutes from the Federal Reserve's April meeting indicated the central bank could hike rates in June. Speaking to CNBC on Wednesday, St. Louis Fed President James Bullard said a move in June or July wasn't set in stone, but labor data suggested it was time to pull the trigger.

The favorable exchange rate has injected confidence in many Australian producers, reflected in the buoyant mood at the annual Resources' Rising Stars Conference that kicked off Wednesday.

Molten gold sits to cool in molds at the Norton Gold Fields' Paddington operations 35 kilometers north-west of Kalgoorlie, Australia.
Carla Gottgens | Bloomberg | Getty Images

"We've got a natural hedge with the Australian dollar so that gives us an Australian gold price of around $,1700 an ounce, which over the course of the last ten years, is a spectacular price," Raleigh Finlayson, managing director at Saracen Mineral Holdings, told CNBC.

That's motivated Saracen to double production to 300,000 ounces by year-end, as the mid-tier miner—which is virtually debt-free—concentrates on more exploration activities, having seen a doubling of its stock price in the past year. It costs Saracen, which counts billionaire Kerry Stokes as an investor, about A$1,075 to produce an ounce, giving the miner a margin of a A$650 per ounce.

A Fed hike and strong greenback could see the Australian dollar slide to the 60 U.S. cent level, but gold prices in Australia will be stable, Finlayson warned.

"The other benefit we have in Australia is declining costs, like lower labor and diesel costs, so there are very good margins in Australia at the moment," he continued.

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Peter Muccilli, CEO of Mincor Resources, a nickel resource company that only recently entered the gold mining sector, echoed those sentiments.

"The Australian gold price is certainly helping us. With that sort of buffering, the outlook for gold [in Australian dollar terms] does remain bullish in the longer term."

As an investment, gold is a great place to be at the moment, noted Hedley Widdup, investment manager at Lion Selection Group, a firm focused on junior miners and exploration companies. "We've seen a robust increase in prices of mining company shares, particularly in the gold space."

Indeed, Australian gold equities have outperformed both the Australian and U.S. gold price, RBC Capital Markets pointed out in a report this month.

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