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September 23, 2015Data Dependent Series

Drop in Gold Output Expected as Mining Companies Lose Money

With many mining companies in the red, analysts expect gold production to drop for the first time since 2008.

According to a Bloomberg report, the anticipated drop in production follows a global surge. Gold output jumped 24% in a decade to a record 3,114 metric tons in 2014, according to data from industry researcher GFMS.

production chart

About 10 percent of the world’s mines are losing money, according to London-based researcher Metals Focus Ltd. Output will start declining as soon as next year, said the chief executive officers at Randgold Resources Ltd. and Polymetal International Plc. Gold Fields Ltd.’s CEO expects a ‘big dip’ from about 2018, while HSBC Holdings Plc predicted the drop will be 25 tons this year.”

Approximately 65% of mined and recycled bullion is used in jewelry and industrial items. Investors buy the rest.

According to James Sutton, a portfolio manager at JPMorgan Chase & Co.’s $2 billion Natural Resources Fund, on average, the industry needs about $1,200 per ounce to break even, taking into account all costs.

Profit margins for the 15 largest producers have dropped as much as 45% since 2011, while their debt has doubled to about $34.7 billion, according to an analysis by Bloomberg Intelligence.

Barrick Gold Corp. ranks as the world’s largest gold producer. In August, Moody’s Investors Service cut the company’s credit rating to one level above junk status. Moody analysts say they expect Barrick to restrict output in the next two years.

The drop in output will likely shrink the implied gold surplus, a measure of mine output and recycling against demand from jewelers, manufacturers and investors. According to Barclays Plc., the implied surplus will drop to 999 tons in 2016, the lowest level since 2012, after reaching 1,476 tons in 2013.

Johannesburg-based Gold Fields CEO didn’t mince words when discussing the future gold supply.

Exploration has been slashed; projects have been put on the back burner. The gold industry supply side is going to drop.”

The likely drop in gold output is just one of many reasons now is the time to consider buying gold. For more information and in-depth analysis on the gold market, get Peter Schiff’s report Why Buy Gold Now? You can download it for free HERE.


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