How $2,250 Hold Comes Into Clearer View
Those of you who have been around the block with me may recall that I've endeavored to periodically update a rough estimate of where the gold mining industry's all-in cost of production is trending. It's not a metric that we encounter frequently amid discussions of gold's long-term price outlook, and I insist that is a frequent oversight by observers of gold from both sides of the philosophical divide.
When gold was getting hammered during Credit Crisis Part 1, comments from the CEOs of Barrick Gold and Gold Fields established that industrywide all-in cost structure in the range of $700-$800. That's one of the reasons why I raised my volume on bullish investment calls as gold approached $700 (also helped that technical indicators corroborated the expectation of disappearing downside risk).
Because the metric is seldom reported or discussed (with kudos to Gold Fields for publishing it regularly), we rely upon occasional remarks or informed estimates to remain up-to-date as to where the floor beneath long-term gold prices may stand.
Well here in 2012, we have corroborating indications from the CEOs of IAMGOLD and AngloGold Ashanti that the industry's alk-in cost structure is presently in the neighborhood of $1,200 to $1,250. According to AngloGold's Cutifani, the figure reaches $1,650 when you factor in the industry's cost of capital. So the next time someone suggests to you that gold prices are wildly inflated by speculative fervor well beyond any notion of a fundamental basis, remind them that the CEO of one of the world's major gold producers estimates $1,650 as the current comprehensive break-even point for the gold mining industry.
That perspective, furthermore, casts a fascinating perspective on the trailing performance of gold mining shares at large. Although cash margins are robust, and lower-cost operators in particular are able to reward shareholders, the majority have struggled with a gold price that has barely -- and perhaps sometimes has failed to -- keep pace with the skyrocketing costs structure.
With capital costs still trending sharply higher, Cutifani's estimate of annual increases of about $150 over the next 4-5 years strikes me as entirely conservative. The condition of global debt and currency markets offers further corroboration by underpinning expectations for continued growth in investment demand. Obviously, under numerous scenarios, gold has the potential to launch dramatically higher, but as conservative expectations to guide medium term investment objectives go, I believe $2,250 gold has never looked any clearer.