Gold Crashes Through Production Cost Levels
Gold fell to its lowest level since 2010 on Friday to under $1,200, which is what it costs many miners to produce an ounce of gold, and analysts tell CNBC that miners will be "severely" impacted if prices stay here.
Andrew Su, CEO at brokerage Compass Global Markets said the average cost of producing gold in Australia, home to some of the world's biggest gold miners, has jumped from $500 an ounce in 2007 to over $1,000 an ounce this year.
"What I believe is that the official costs, the costs in reality, are significantly higher than $1,000. So we've had quite a few gold mines close in Australia," Su said on Friday. "We've had some companies actually go bust and we've also got significant job cuts by big miners like Newcrest, Barrick, and Silver Lake Resources."
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Su adds that fixed costs like paying workers are actually rising quite significantly while gold prices have fallen, adding more pressure to miners' operations.
According to industry experts, the total cost of production varies between $1,000 and $1,200 an ounce depending on the scale of a miner's operations.
"There's probably a lot more going in the background than we are hearing about. The gold companies are scrambling around," Su said. "We had some companies that have costs that are well above $1,000 and they will be feeling the pinch."
Gold's rout since April has been magnified this week with bullion on track to record its worst quarter since at least 1968 on ongoing worries about the tapering of quantitative easing by the U.S. Federal Reserve. It fell to a three-year low of $1,180.48 in early Asian trade on Friday and is down nearly 14 percent or about $200 an ounce since the beginning of last week.
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Gold miners, meanwhile, have been feeling the heat. Shares of Sydney listedNewcrest Mining, the world's third biggest gold producer, fell below 2 percent in morning trade, and are down over 52 percent since April. New York listed shares of Canada's Barrick Gold, the world's biggest gold miner, are also down almost 50 percent since April.
Ric Spooner, chief market analyst for CMC Markets said gold falling below $1,200 an ounce is certainly at the level where miners, especially the smaller ones, will face profitability issues.
"Some miners may hold - depending on their cash flow situation - some production and inventory for a while just to see what happens," Spooner said. "We're into that territory now that we will be starting to see a lot of marginal production from a lot of the smaller miners."
Su backed that sentiment, adding that miners will start to close down some of the more costly mines, spend less on exploration and invest less in general.
Smaller Australian miners that have ceased operations over the past year include Central Norseman Gold and Navigator Resources, according to local media reports.
Calls, however, that gold will plunge even further to below $1,000 an ounce is unlikely, according to Su, who said that would mean most of the mines in Australia would become unprofitable.
"It [prices] may fall there for a very brief period of time, but I think the economics of it is such that the entire industry will fail to exist if gold falls further," Su said.
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Gold prices should start to stabilize once there's a significant reduction in supply as miners cut back, Su added.
"This fall in the price of gold is not truly based on supply and demand - It's based on expectations of what the Federal Reserve is doing," Su said. "I think that somewhere along the line the gold prices will simply start rising, because production will reduce supply significantly."
- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu