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A Signal that Gold prices are too low?

Low gold prices are starting to cure low gold prices it appears.

The first signs of meaningful production cuts for the industry emerged this week, in Ghana.

Ben Aryee, head of the state Minerals Commission, told reporters that Ghana’s gold output may drop as much as 18% this year. Aryee reported that the nation’s production in the second quarter fell 6.4%, to 1.021 million ounces.

He singled out the low gold price as the direct cause of falling output, saying that gold production “will definitely decline” as “companies are scaling down operations”.

Such sweeping cuts from a top-ten producing nation are a sign of the times. As the chart below shows, the latest numbers from major gold producers like Barrick, Newmont and Goldcorp suggest production costs including sustaining capital are averaging close to $1,150 per ounce. Higher-cost producers are making little money at the current $1,300 gold price.

Screen Shot 2013-09-26 at 6.06.04 AM

This should put a floor on gold in the medium- to long-term. Any downward price movement from here would trigger more mine closures like the ones we’re seeing in higher-cost Africa (you can see above that sustaining costs for producers like African Barrick are over $1,500 per ounce). Tightness in supply would result.

Of course, in the short-term anything is possible in commodities markets. But the indicators are telling us that moves lower shouldn’t last long–and thus might constitute good buying opportunities for bullion and producing stocks.

Here’s to the price being right,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

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