Even Gold Mining Companies Have Problems

gold nugget

So you’ve got a hole in the ground and you’re mining a precious metal and selling it on the open market. What could possibly go wrong? Plenty, actually.

The gold mining industry as a whole is nearing a point where they’ll need to reduce output or even shut down some of their operations completely. With the price of gold reaching a four-year low, mines are being forced to slash costs and rethink their strategies. Gold prices have lost ground to the U.S. dollar which has climbed versus other currencies amid currency debasement by the Bank of Japan and the specter of other nations following suit.

After a 12-year bull-run, gold reached a record $1,923.70 an ounce in 2011. Just like when developers build more and more houses when demand is high, mining companies rode the demand for gold for all those years, increasing expenditures because they could afford to. For many mines, at a certain price, gold reaches too low of a threshold to be sustainable for their own economic viability. They have few options. How can you continue production with losses on every ounce of gold you mine? You can’t, for very long. Once you’ve cut production as much as possible and you’ve put off exploration projects as long as you can, something’s got to give.

With fewer new discoveries, deposits get harder and harder to find as existing production gets mined out, and new gold discoveries peaked at 175 million ounces in 1995. Many of the current untapped deposits require more expensive mining operations due to topography, environmental risks and a lack of infrastructure, increasing their “cost per ounce.” Mines may decide to place their operations into a “care and maintenance mode,” “harvest mode,” or simply shut down completely.

What does this do to the price of gold? If less gold is being produced, it’s the simple law of supply and demand. Long-term, prices will need to go up to keep up with the demand for a commodity that’s in short supply. A sharp drop in production can only help to lift prices. The last time the price of gold was this low in relation to mining costs was in 2001, leading to a strong buying period.

For investors, it’s a lot like having the opportunity to buy a product at cost. If you’re buying a car, your goal is to agree on a price that’s as close to the cost of production as possible. When the price of an ounce of gold is nearly the same as the cost of mining it, it stands to reason that it would be a good investment.

Most financial advisors agree, investors will recognize the decrease in new gold at some point and prices will reflect that new demand.

For long-term financial goals, gold is a sound investment. If you’d like to diversify your retirement portfolio with physical gold or make a cash purchase, call Advantage Gold today at 1-800-341-8584 to speak with one of our specialists.

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