Gold Supply Disruptions and Paradigm Shift in Gold Miners’ Business Strategy

  • Aug 05, 2020 AEST
  • Team Kalkine
Gold Supply Disruptions and Paradigm Shift in Gold Miners’ Business Strategy

Summary

  • Gold is once again talk of the town with recent surge in gold spot to a record high of USD 2,031.07 per ounce, well above the much-awaited mark of USD 2,000 per ounce.
  • Investors have embraced gold in 2020, leading to a gush in spot prices, and prompting gold to surpass returns from almost all major asset classes.
  • Gold has been a sprinter in a marathon originated in 2015 with both its short-term and long-term trend turning bullish in nature.
  • While there are many factors behind the gush for gold, one particular emerging interest, is supply chain disruptions.
  • In the wake of a bull rally in the spot market, global gold mining companies now seem to be bringing forward a paradigm shift in the business strategy.

Gold prices are once again capturing global attention with the spot reaching another record high of USD 2,031.07 (as on 5 August 2020 12:43 PM AEST) to breach and trade above the much-awaited price of USD 2,000 per ounce.

Investors have embraced gold in 2020 so far as a tool to hedge their portfolio, leading to a bullish run in the gold spot, which has emerged as the best performing asset so far, outperforming a majority of other asset classes.

The increased relevance of gold as a hedge could be seen in the recent spike in purchases from global gold-backed ETFs that in June 2020 increased threefold to stand at a record of 3,621 tonnes.

Gold has been a sprinter in a marathon since the onset of 2015 with both the short-term and long-term trend turning bullish in nature, ignited due to the economic meltdown led by the COVID-19 outbreak across the global front.

To Know More, Do Read: Gold- A Sprinter in the Marathon, Is the Price Rally Sustainable?

While there are a multitude of factors behind the gush for gold, one emerging interest is supply chain disruptions, a side of the trade equation, which seldom has been a reason of major concern among gold enthusiasts.

The Supply Side Story and The Changing Strategy of ASX-listed Gold Miners

Across diverse geographies, travel and work restrictions implemented by several national and local governments amid the pandemic led to a decline in workforce availability for the gold mining industry, prompting many gold operations across the globe to halt or reduce operations and operational activities,  during the first quarter of the year 2020.

  • Several key mining nations, as identified by the World Gold Council (or WGC), including China, South Africa and Peru, witnessed a decline in operational activities due to lockdown restrictions, leading to a decline in global production.
  • Additionally, despite a slight increase in gold production, especially across prominent mining countries like Australia, overall mine production fell by 3 per cent during the first quarter of the year 2020 against the previous corresponding period to stand at 795.8 tonnes, as reported by WGC.
  • Furthermore, global mine production declined by 10 per cent against pcp and ~ 2.38 per cent on a quarterly basis to reach 776.8 tonnes during the second quarter of the year 2020.

The decline of 3 per cent against pcp during the first quarter also represented the largest y-o-y fall since Q1 2017.

The recycling counter, which contributes ~ 25 to 30 per cent in the global supply chain, also declined.

  • As per the data from WGC, recycled gold marked a 4 per cent decline during the first quarter against pcp to stand at 280.2 tonnes.
  • While the surge in recycled gold production remained relatively flat (~ 1.96 per cent) on a quarterly basis in Q2 2020, it slipped by 8 per cent against pcp during the second quarter.

While the supply chain clearly demonstrated some impact of the worldwide free movement restrictions, contributing to the gold rally; nations with relatively strong production quarters, such as Australia, witnessed a paradigm shift in the business strategy of gold mining companies.

The paradigm shift in the business strategy of gold mining companies across the globe primarily circulates around reducing the exposure in gold futures and increasing the same in the spot market, resulting in a net decline in gold demand for producer hedge.

  • As per the data from WGC, the net producer hedge declined to -9.7 tonnes against pcp during the first quarter of the year 2020 while further declining to -28.0 tonnes during the second quarter of the year 2020, representing a multi-fold decline against pcp.
  • Two leading examples of the adoption of such a business strategy are ASX-listed prominent gold miners- Saracen Mineral Holdings Limited (ASX:SAR) and Northern Star Resources Limited (ASX:NST).
  • During the June 2020 quarter, NST reduced its hedge book to 536,426 ouncesas part of the strategy to increase its exposure to the spot price, while bringing back the pushed-out position.

To Know More, Do Read: Elevated Gold Spot Prices Transcending into Strong Financial Position for Saracen and Northern Star

In a nutshell, the gold spot has climbed another record high, supported by an economic meltdown led by the COVID-19 outbreak, leading to a demand rush from global gold-backed ETFs.

  • Apart from growing pessimism around the economic recovery shape, a considerable decline in the United States dollar is another factor contributing to the gush in gold amid buying from central banks to hedge their dollar swap.
  • While there are a multitude of factors leading to bullish sentiment in gold, one particular emerging interest, is supply chain disruptions, a side of the trade equation, which seldom has been a reason of major concern among gold enthusiasts.
  • Additionally, in the wake of skyrocketing spot market, gold mining companies are changing their business strategy and reducing their hedge book position in order to take more exposure in the spot market.

 


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