Gold Market #3

From Bloomberg:

Newcrest Mining Ltd., Australia's largest gold miner, is ``looking'' at closing its gold hedge book. . . . Miners sell production before it's mined to hedge against a drop in prices. Newcrest has about 700,000 ounces of gold hedged each year for the next 5 1/2 years, Smith said.

The real trick in the gold mining business is the all-in total cost of production per ounce. The all-in total cost of production is the mine cost of production, all administrative costs of the company, and any debt service. Those companies that are most successful commonly have the lowest cost of production. The difference between the cost of production and the price of gold is profit. To reduce your risk in the business a company will sell some portion of its production forward to lock in a price and therefore, stabilize their revenue. Then the only variable that a company needs to control is their own costs.

If you look at the price of gold in the last 20 years one will notice that the current high prices of gold are a relatively recent and the price of gold was in the $300 - $400/oz. for much of the last 2 decades. In addition the period of the late-1990s the price of gold was consistently below $300/oz. That was a period of limited exploration for new gold deposit and limited mine production, which contributes to the tight supply situation in the market today.