The biggest gold bust in three decades is about to end a six-year expansion in mine output.
From Russia to South Africa to North America, the biggest producers saw profits turn to losses as prices plunged, forcing them to cut spending on mines in half over three years. While bullion output will probably reach a record in 2015, the increase will be the smallest in at least six years, before production drops 1 percent in 2016, according to Barclays Plc.
Mines supplied 3,114 metric tons last year, an all-time high valued at about $127 billion, after companies stepped up investment to capitalize on prices that surged more than fivefold in the decade through 2011. While the appeal of gold as a financial asset means that supply doesn’t usually influence the metal’s value as much as economic or monetary policies -- partly because every ounce ever mined still exists -- demand is growing in China and India, the largest buyers.
“Any contraction in mine supply will tend to tighten the physical market, which feeds through to price,” John Meyer, an analyst at London-based brokerage SP Angel Corporate Finance LLP, said by telephone on Thursday. “It is also a positive influence in a larger dynamic that influences investor sentiment towards gold.”
Gold for immediate delivery was $1,210.94 an ounce at 12:15 p.m. in London on Tuesday, 37 percent below the all-time high in 2011.
With prices so low, about 10 percent of global production isn’t profitable, based on data from Metals Focus, a London-based industry consultant. The estimate includes the expense of mining and replacing reserves through exploration, as well as other costs. The firm, along with Morgan Stanley and Natixis SA, predict global gold output will decline.
“The big question is how fast supply will start falling,” Nic Brown, an analyst at Natixis, said in an interview from London on Wednesday. “We don’t think we are going to see sharp declines until at least 2017.”
Barrick Gold Corp., the biggest producer, had a $2.9 billion net loss last year, the biggest since 2009, on lower prices and writedowns of mines in Chile and Zambia. AngloGold Ashanti Ltd. said in February that it will cut output by as much as 10 percent this year as it spends less and stops mining high-cost deposits. The New York-traded shares of both companies plunged by more than 70 percent since the end of 2011.
Capital spending, which covers maintenance and exploration, has fallen about 50 percent since 2012, according to data from Bloomberg Intelligence that tracked 11 of the largest gold producers. Ten of the world’s major producers posted a combined loss of $6.9 billion in 2014, compared with combined profit of $11.3 billion in 2010, the Bloomberg Intelligence analysis shows.
“Gold is money, but it is also a physical commodity, so if you reduce any element of supply, you will see price impact at the margin,” Bart Melek, an analyst at TD Securities, said by telephone from Toronto on Thursday. “As monetary policy becomes less uncertain, supply-demand fundamentals will become a more important factor.”
Bank of America Corp. and Standard Chartered Plc said in March 30 reports that the metal will probably advance in 2015, snapping two straight years of declines, as the Federal Reserve raises interest rates at a gradual pace. Bullion will average $1,300 in the fourth quarter, Bank of America predicted. Standard Chartered sees an average of $1,320.
Money managers have become less confident in a gold rally as low inflation and a strong dollar erode the appeal of the metal as a hedge.
Speculators cut their net-long positions in U.S. gold futures and options by 73 percent since the end of January, Commodity Futures Trading Commission data as of March 31 show. Investors sold more than 800 tons from gold-backed funds in the past two years, leaving holdings near the lowest since 2009, data compiled by Bloomberg show.
During the mine expansion, when prices were higher, many producers acquired deposits with lower-grade ore that have higher costs to extract the metal, according to Natixis. While the World Gold Council estimates mine output increased an average of 114 tons per year from 2009, production will fall 14 tons this year, Metals Focus said. By 2018, the industry may generate 100 tons less than four years earlier, the consultant said.
“When you see mine production going down, it does influence the thought process of investors,” Grant Sporre, an analyst at Deutsche Bank AG, said in an interview in London on Wednesday. “In that sense, it is a bit of a double whammy.”