Since gold prices hit all-time records in early May this year, breaking through the US$2,000 per ounce level, we have seen a cooling off in reports of bullion purchases by central banks. What's more, Mark Bristow, owner of Barrick Gold Corp. the world's second largest gold mining company, seems to be prioritising copper mining. He justifies this by, among other things, falling gold prices and demand. Let's take a look at whether it is profitable to invest in shares of copper miners?
Major gold miners
According to the World Gold Council (WGC), 3412 tonnes of gold were mined in 2022. China accounted for the largest share of mining (11%), followed by Russia (9.5%) and closing the podium with Australia (9.2%). The same institute gives an estimate that only 208 000 tonnes of precious metal have been mined since the beginning of our civilisation's history, which, if accumulated in one place, would only fill four Olympic swimming pools.
Gold is used most frequently in jewellery: (as much as 46%), bars and collector coins (22%) and central bank reserves (17%). Annually, the stock of gold on the market is increasing by approximately 1.6%.
The total cost of maintaining mining so-called AISC has risen noticeably in recent years, to around US$1,250/oz (an increase of 15% year-on-year). These increases do not seem to be offset even by relatively high bullion prices. This is reflected in the quotations of the VanEck Gold Miners UCITS ETF (GDX), which is as much as 45% short of its peaks.
Source: https://www.gold.org/goldhub/data/aisc-gold#from-login=1&login-type=google
It seems interesting to note that the largest gold mining companies are based in Canada, accounting for as much as 41% of the fund's value. The three largest entities are NEWMONT CORP, BARRICK GOLD CORP and AGNICO EAGLE MINES LTD. All-in sustaining costs (AISC) for these companies in the first quarter were US$1376, US$1436 and US$1125 respectively. The data indicates that the largest players may be struggling to realise the potential of increases in crude prices, mostly translating into a decline in their profitability.
Source: Conotoxia MT5, GDX, Weekly
Demand for gold still strong?
In Q1 of this year, the rate of growth in gold demand slowed from 18 to just 1%. Central banks still showed strong interest in bullion, adding 228 tonnes to global reserves (up as much as 176%). However, the quarter-on-quarter dynamics of their purchases fell by 24%. Investment in gold bars and coins rose by 5% to reach 302 tonnes. Demand for ETFs, on the other hand, fell, reducing demand by 29 tonnes compared to the previous year.
Jewellery consumption remained relatively stable at 478 tonnes (up 1%), with production here outstripping demand, contributing just over 30 tonnes to the global stock.
The use of gold in the technology sector seems to reflect the effects of the difficult economic situation. Demand has fallen to 70 tonnes, the second lowest since 2000.
Source: https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2023
The main driver of gold demand since the beginning of last year has been a surge in purchases by central banks. However, this trend seems to be fading month by month.
Why do central banks increase their gold reserves? They usually decide to do so for two main reasons. The first is to protect themselves in the event of a crisis or recession. Additional reserves in such a case increase the stability of, among others, the banking system. The second reason is to strengthen the stability of their currency, i.e. to protect themselves against inflation. This is an alternative to placing funds in the foreign exchange reserves of other countries.
Current purchases appear to be motivated mainly by global inflation, which is falling faster than originally expected. For this reason, central bank demand for gold may decline significantly in the coming quarters, which could lead to a cumulative fall in bullion prices.
Source: Conotoxia MT5, XAUUSD, Weekly
Grzegorz Dróżdż, CAI, MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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