SEATTLE (Scrap Monster): Amid an unprecedented global pandemic and geopolitical events that have thrown markets into turmoil, gold has remained resilient and has maintained its status as a safe haven asset during tumultuous times.
So, how will this precious metal fare this year and in the years to come and what does it mean for mine production output? GERARD PETER reports.
Geopolitical events and the coronavirus pandemic have had a bearing on mine production over the past few years. In 2021, mine production was 3 570 t, a 3% increase from the previous year. This was largely due to fewer pandemic-related disruptions.
Meanwhile, 2022 saw a 1% increase on 2021. Adam Webb, head of mine supply at Metals Focus points out that Russia, the world’s second-largest gold producer, had a major impact on global output.
“We estimate a decrease of about 30 t from Russia in 2022. This is because miners in the country have struggled to get finance and equipment from Western sources. Also, we saw companies such as Kinross closing their mines and exiting Russia.”
While Russian production decreased, this was offset by China increasing production by 39 t in 2022, laying the foundation for the upward trend to continue in 2023. Webb believes that there will be a 3% increase in output this year as several new projects come online.
Canada is expected to be in the driving seat with new projects going into production as well as the expansion of existing mines, all of which will result in the country significantly increasing its output.
When it comes to Africa, the world’s largest gold-producing region, predicted output will vary from country to country. “We’re expecting a significant rise in Ghana with new projects coming online. Most noteworthy is the ramp-up of AngloGold Ashanti’s Obuasi operation. We are also expecting an increase in output from South Africa which experienced lower production in 2022 due to strike action at Sibanye Stillwater’s mines,” Webb explains.
While some countries will see an increase in production, it will be the reverse for other countries. For example, Webb points out that security issues in Burkina Faso, particularly in the northeast of the country, has led to several mines closing down.
“The situation in the country has also resulted in a lack of interest in investment in projects. So, for that reason, we’re expecting declines in production from Burkina Faso. Also, we are expecting a decrease in production in other countries due to grade declines as mines come to the end of their lives.”
Taking these factors into account, Webb expects a 3 t increase in African gold output in 2023. “So, while Africa will continue to be a significant producer, growth will be less than in other parts of the world this year,” he adds.
When it comes to attracting funding for projects, Webb explains that many investors are taking ESG into account tojustify their spend, particularly when it comes to power supply.
“If you look at South Africa, Eskom is a coal-fired utility, therefore, greenhouse gas emissions are much higher. When you compare that to other countries, such as the DRC where a lot of the electricity comes from hydroelectric power, this is more attractive to investors due to lower associated greenhouse gas emissions. This is a trend that is increasing and will continue in the future.”
In addition to ESG compliance, Webb points out that when renewable energy solutions are implemented, it ultimately reduces operating costs at a mine, making it more attractive to investors. “For example, once the capital is invested in a solar plant and it is up and running, the cost of power is significantly reduced compared to using a diesel generator. As such, looking at renewable energy at gold mines also has operating cost benefits.’
Looking towards 2023, Webb expects continued growth in the next two years before global output flattens. He believes that the next significant growth point will be around 2027/28 when several big projects come online. “At the same time, however, it must be pointed out any long-term trend is influenced by the gold price,” he states.
Gold price outlook
Uncertainty favours the gold price. During the height of the COVID-19 pandemic, the gold price breached the US$2 000/oz mark around mid-2020. It reached a record high of $2 074/oz in March 2022, following Russia’s invasion of the Ukraine. However, what goes up must come down and after reaching a record high, the price in December 2022 was hovering around the $1 700/oz mark.
Will it remain at this average or are we going to see a change in fortunes – good or bad – in the not-too-distant future? According to Philip Newman, MD of precious metals consultancy Metals Focus, gold will continue to be a safe haven asset. “In 2022, gold outperformed equities, and institutional investors will bear this in mind. Despite facing headwinds, it is still fulfilling that safe-haven role,” he states.
Newman points out that there are many factors to consider that will determine the gold price, however, none of these can be looked at in isolation. One such factor is the performance of the US dollar. “There is an expectation that the US Fed may now start to have a slower pace of rate increases, which could weigh on the dollar and so have an impact on the gold price.”
Another key factor is inflation. When inflation rises, it should bode well for gold. However, this is not necessarily the case, Newman explains.
“This year, investors have looked at inflation and believe that, with rates having been historically depressed, this has an impact on how institutional investor’s view gold.”
When it comes to forecasting the gold price, Newman points out that it is impossible to factor in a black swan event, such as a global economic crisis or a war. Rather, any forecast is determined by the performance of countries’ macroeconomics. This considers interest rates, taxes, and government spending to regulate an economy’s growth and stability.
“For example, if you look at the current US market, it is gradually heading higher. With gold being a non-interest-bearing asset, this is an important headwind. And so, we think that headwind will continue and will, therefore, weigh on gold,” Newman explains.
Often when geopolitical events happen, such as the war in Ukraine, there will be a knee-jerk reaction when it first emerges, and this will affect the gold price. However, Newman points out that this is short-lived and has less of a lasting impact on the gold price than macroeconomic developments.
“The actual event of the war had a short-term impact on gold, whereas how that has resonated through in terms of inflation and central banks’ actions, the war in that context, is having a more lasting impact on gold.” Newman believes that the gold price will average around $1 600/oz in 2023.
This is largely since there is a presumption that inflation will decrease. This in turn will see real yields rise. He explains that gold will come under a lot of pressure towards the end of this year on the back of improved economic conditions.
“As things start to gradually improve, it could encourage investors to move out of gold and in favour of equities. Meanwhile, painting a picture for the precious metals over the longer term, Newman believes that with a positive macroeconomic backdrop and equities doing well, the gold price could struggle initially.
“That said, investors will remember how gold has performed and when prices do weaken, that will encourage them to do some bargain hunting and this will lend some support to the price. That would help to arrest some of those declines that we can see coming over the next few years,” he concludes.
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