Graph: The Price of Gold & The Cash Cost of Mining Gold

This post looks at the average gold price and the average cash cost of mining gold in recent years, in the graph below. The averages are over each year.

Data Source: VM Group, Haliburton Mineral Services

From the graph, you can see that both the gold price and the cash cost of mining gold have been increasing over the years. The difference between the two has also been increasing.

What is cash cost?

The cash cost of mining or producing gold is a term commonly used by the mining industry. It is essentially the operational cash cost of the mine per unit of production. The exact definition may vary by company. It generally includes transport, refining and administration costs and royalties, but excludes taxes, depreciation / amortization (this is a non-cash cost), financing and company-level costs (e.g. head-office expenses). Hence, the cash cost is different from the production cost of the mine.

Why is cash cost important?

The cash cost is commonly used to compare across mines. Since the gold price is the same, the mines with the lower cost would generally have higher profit margins and have a greater buffer when the gold price drops. Hence, investors often look to invest in the lowest-cost producers.

Why has the average cash cost increased?

The large increase in gold prices in recent years has allowed previously economically unviable gold assets to become viable to mine. In addition, cash costs have increased due to mining of lower-grade ore (mining to a lower cut-off grade), increase in operational costs (such as fuel costs, labour costs and consumables) and general inflation. For example, due to the commodities boom in the past few years, the demand for skilled miners and managers in the mining industry has increased tremendously, leading to an increase in their wages.

For a longer history of gold price, cash cost and production cost, you can take a look at this presentation by CPM Group. The general trend is the same.

You can also find here a longer history of the gold price alone.

Data Source: VM Group / Haliburton Mineral Services; Graph: Generated by me

Graph: The Price of Gold

Today, we look at the historical gold price (nominal) from 1972 (the US left the gold standard in 1971) to now, in the graph below.

Data Source: Bundesbank; Prices are monthly averages of London afternoon fix spot prices

As you can see from the graphs, the gold price per ounce stayed in a band of US$200 – 500 from the 1980s to the mid-2000s. Then it started increasingly rapidly, together with the rest of the commodities. The average gold price for January 2012 already reached US$1,656 per troy ounce.

Why has the gold price gone up by so much? The price of gold, like that of most commodities, is driven by supply and demand as well as speculation.

On the demand side, gold demand includes:

•  Household gold demand, mainly from Asian countries like China (gold ownership for Chinese citizens was legalized in 2004) and India, with a large part of it in jewellery
• Central bank gold reserves buying
•  Increasingly, a large part of gold demand has been from investment in gold.
• Currency (gold coins)
• Electronics, Dentistry and other industrial uses
• Gold hedging by producers (though these are at very low levels now due to the high gold prices)

On the supply side, gold supply includes:

• Gold production from gold mines
• Recycling of old gold – Most of the gold ever mined still exists in some form or other, and could come back into the market at the right price.

Would the gold price go up further? It depends on all of the above factors and the market sentiment.

  

If you like price per gram instead, here’s the chart. (This uses the conversion: 1 ounce of fine gold = 31.1034768 g)

Data Source: Bundesbank; Prices are monthly averages of London afternoon fix spot prices

You can also find here a comparison of the price of gold vs the cash cost of mining gold in recent years.

Data Source: Bundesbank; Graphs: Generated by me