Production Cuts Could Put a Floor Under Gold Prices
Gold prices could really soar. Pay attention to the gold mining companies; they are struggling and gold production is at stake and this is all happening while demand is surging. Basic economics says this is the perfect recipe for higher gold prices.
As it stands, mining companies are reporting their production figures for the third quarter of 2015 and commenting on their operations. Due to declining gold prices, we see a significant amount of pessimism among mining companies. This suggests the supply side could be severely constrained, further distorting the current supply-and-demand situation. Bulls should be happy, as higher gold prices could be ahead as a result.
How Are Mining Companies Reacting to Low Gold Prices?
Kinross Gold Corporation (NYSE:KGC), a well-known senior miner strapped for cash, recently reported that “Kinross is keenly aware of the need to remain proactive in the current gold price environment and in recent months we have taken decisive action to reduce headcount…” (Source: “Kinross reports 2015 third-quarter results,” Kinross Gold Corporation, November 11, 2015.)
The CEO of Randgold Resources Limited (ADR) (NASDAQ:GOLD), which is a major gold streaming company, said, “The gold mining industry is severely stressed and Randgold is certainly not immune to the pressure.” (Source: “Randgold posts new production record, speeds up exploration drive,” Randgold Resources Limited, November 5, 2015.)
As an avid follower of gold mining companies, it is really interesting to see even a few mining companies mentioning lower gold prices as one of their constraints.
But this isn’t all.
You must remember that if gold prices remain suppressed, the misery will only continue. Some mining companies may not be saying they are hurt by low gold prices, but their financials are very clear on the impact lower gold prices are having on the company.
Take Eldorado Gold Corporation (NYSE:EGO) as one example. In the third quarter of 2015, the company generated cash flow of $43.36 million from operating activities. In the same period a year ago, this figure was $78.74 million. (Source: “Eldorado Reports 2015 Third Quarter Financial and Operational Results,” Eldorado Gold Corporation, October 30, 2015.) In other words, cash flow at this gold producer has dropped approximately 45%.
Understand this: cash flow is, hands down, the most important part in the current low-gold-price environment. Plus, Eldorado Gold isn’t the only company reporting a massive decline in cash flow; many more companies are doing the same. With this said, I beg to ask two questions: 1) how long can these companies survive if gold prices remain at the current level and 2) will they continue to produce more?
Proof Gold Production Is Already Falling
If all of the above wasn’t enough to convince you that gold prices aren’t affecting the supply side, then just look at the gold mine production in the U.S.
In the first eight months of 2015, mines in the U.S. produced 134,000 kilograms of gold. (Source: “Mineral Industry Surveys,” U.S. Geological Survey, last accessed November 11, 2015.) In the same period a year ago, mine production came in at 140,000 kilograms of gold. (Source: “Mineral Industry Surveys,” U.S. Geological Survey, last accessed November 11, 2015.) This represents a year-over-year decline of more than four percent.
If you look at other major gold-producing regions, we see they’re reporting dismal production figures, too.
Why Gold Prices Could Soar in 2016
Dear reader, investors have bought into the idea that the precious metal isn’t worth it anymore and the expectation that the Federal Reserve will soon raise rates is only adding more fuel to the fire. As a result, gold prices remain suppressed.
The basic fundamentals of the gold market are improving each day. As I see it, every day gold prices remain at their current levels, the opportunity for investors just gets better. The precious metal appears undervalued at this time and has a very bright future ahead. We could see gold prices soar in 2016.