Gold Drops Below Cash Cost, Approaches Marginal Production Costs
As we showed back in April, the marginal cost of production of gold (90% percentile) in 2013 was estimated at between $1250 and $1300 including capex. Which means that as of a few days ago, gold is now trading well below not only the cash cost, but is rapidly approaching the marginal cash cost of $1125... Of course, should the central banks of the world succeed in driving the price of gold to or below its costs of production (repressing yet another asset class into stocks) then we fear the repercussions will backfire from a combination of bankruptcies, unemployment, and as we have already seen in Africa - severe social unrest (especially notable as China piles FDI into that region).
Which means that of the following mines (as we showed here) which make up the gold cost curve, one by one, starting on the right and going left, production is going to go dark, even without the recent demand by South African gold miner labor unions to have their wages doubled. Until eventually virtually no gold will be produced.
It is at that point where one must apply the New Normal supply and demand curve, when one can predict a $0 per ounce price for gold, as physical demand continues unabated, while actual physical, not paper, production has now started going offline.
Joking aside, not even Bernanke, Yellen, or all the paper Gold ETFs in the world will be able to do much to suppress gold prices from reaching their fair value when gold production hits a standstill, and when demands, especially by China, is still in the hundreds of tons each year.
To prove this point, and using the gold sector as a proxy, Bachmann showed that over the last 10 years, while shareholders have seen a 158% return, government’s over the same period have seen
a 1,488% increase in their share, while the direct packages of executives have risen 1,032% over the same ten year period.
“There is a huge disconnect between the shareholders and the executives,”
There is also a huge disconnect between the ESF/ bullion bank paper price and physical demand.
To some extent, they apparently lowered the minimum grade significantly once gold prices started their ascent, and started mining in areas which, in retrospect, should have never been given the get-go to mine. The Randgold CEO spoke of this in a recent presentation (I read it on either Mineweb or Northern Miner).
While ANV is perhaps the lowest-grade bulk mining project around, they did show that bulk mining of this low grade can be profitable -- as long as you have lots of it. The added costs of mining the sulfide portion over the oxide portion are things that unfortunately weren't mentioned much in many early articles about ANV, but that seems to be common knowledge now.