|Updated: 2 Apr., 2007|
2 April, 2007
Several years ago, when gold began its rise to the plus $700 range, the average cost of producing an ounce of gold for the major gold mining companies was $250. Since that time, a heady era in gold mining has brought a boom in exploration, a expansion of mining activities, and gold has flourished. However, the economies of the US, Europe, China and Asia in general have all flourished, making some common resources a bit scarce. This, according to the laws of supply and demand, cause the price to go up. Gold mining companies, along with all other mining companies, have experienced higher prices for energy, fuel, supplies, equipment and labor. Newmont Gold actually found it feasible to build their own power generating plant, to reduce their cost of electricity, at a mine in Nevada.
So, what does all of this mean? After all the price of gold has increased from a January 2005 price of $420/ounce, to over $700/ounce, and currently hovering around $650/ounce. Well, that means that the cost for producing this gold must be increasing, also. And it has, from around $250/ounce to currently over $300/ounce for the major gold producers. Some new mines are being brought on line with projected cash costs of an ounce of gold at slightly over $400/ounce. Just break even 2 years ago. Another factor in the increased cost of an ounce of gold from a mine, is the quality of the reserves. As the higher grade gold ores are mined, they become more scarce, and lower grade ores become feasible to mine at prices over $600/ounce. The quality of reserves actually has the greatest effect on the cost of producing an ounce of gold, since a rich ore body can weather many maladies and remain very profitable.
As companies strain to replace reserves currently being mined, they are having difficulty in doing so. New, large reserves capable of justifying the huge capital outlay of putting in a new mine ($500,000,000 to +$1,000,000,000) are becoming very difficult to find. Consolidation, or purchasing other companies is one way major gold companies did this in the late 1990's, but now, there are not many gold companies left to purchase.
Further, according to the US Geological Survey, there is less than 60 years of gold left in the entire world, at current mining rates. So, past experience and logic would say that as the reserves become more scarce, they will become more difficult to find, since the easily mined reserves have long since been mined. But, since gold is an element, and can not be destroyed (except for a possible large nuclear fusion reaction, such as takes place in the sun), all of the gold ever mined on the earth is still here, in some form. Except for a few sattelites, and a couple of planetary exploration spacecraft, we have not been shipping it into space, so it remains on planet earth, somewhere.
All of this points to the continued rise in the price of gold, so long as it is desired, and the desire appears to be as strong as it ever was, with many new investors diversifying their portfolios with the purchase of gold, for the first time. Could this point to $1,000 an ounce gold next year? Quite possibly, but I think definitely by 2009, gold will have hit a 4 digit price per ounce.
In the meantime, gold mining companies need to spend more on exploration and R & D to find more, economical reserves for the future, or, quite frankly, they will be out of the gold business. Eventually this will occur, unless Mars has large reserves of gold. I believe that one of the moons of Jupiter or Saturn has a huge percentage of platinum in its composition. Yes, percents of Pt, not a fraction of an ounce per ton! So will mining companies of the future be astronauts? I believe they will be both space pioneers and astronauts, which by that time may not be much more than catching a flight to New York. Those transport costs might really be high, though, not to mention the travel time to and from the planetary mine.
Since Mars was geologically active with volcanos, it could easily have quantities of precious metals, and other elements that we use on earth. Will the first geologist on Mars stake a claim? We will just have to wait and see.
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