Bullish sentiment for Gold
While governments are trying to put the pandemic behind them, at least on an economic front, inflation seems to be a growing concern amongst economists, investors and the general public. And gold, as a proven hedge against inflation, has been enjoying renewed investor interest. Since reaching a year’s low of $1,682 in early March, the gold price has been steadily increasing, up to $1,849 at the time of writing, 12 November, representing around a 10% rise in nine months.
Physical demand for gold has returned almost to pre-pandemic levels during the first nine months of 2021, increasing by around 34% compared to this period last year. The sectors in which demand has increased the most are jewellery and purchases from the official sector. Offsetting this, ETF demand is declining, as some investors are shifting towards other investment assets.
Gold Mine Production
The bullish sentiment around the yellow metal is also boosting interest in gold miners, whose Q3 results are being released. Mine production has resumed to pre-pandemic levels, and we estimate that global output this year will marginally surpass that of 2019, which was an all-time high. But rising operating costs, higher expenses derived from the pandemic and increasing environmental costs, resulting from the objective to reduce the carbon footprint and improve the results on other ESG-related variables, are having a toll in miners’ revenue margins.
Preliminary results show that during the third quarter of 2021, AISC-Price margins (the difference between spot price and the global All-In Sustaining Cost weighted average) have decreased by a quarter, compared to the same period last year, and are currently on the $700/oz mark.
Although we have to consider that the All-In Sustaining Cost (AISC) does not represent the total cost of mining and commercialising gold, as some expenses, such as corporate income tax, are not included, it’s a good approximation that helps indicate how profitable gold mining is at the moment.
We estimate that global output this year will marginally surpass that of 2019 which was an all-time high
Source: Refinitiv Metals Research
Chart 1: Mining costs rose back to 2013 levels
Source: Refinitiv Metals Research
Chart 2: Mining costs in Latin America and Asia have doubled since 2010
Mining Costs
During the third quarter of 2021, Total Cash Cost reached $818/oz, increasing by 1% compared to the previous quarter, while AISC rose by nearly 2%, totalling $1,086/oz. At a regional level, Refinitiv Metals Research has found that mining gold in Latin America and Asia costs nearly twice as much as it did back in 2010, while costs in Europe have increased by only 10% in the same period of time.
This is mostly explained by high inflation rates and increasing labour unrest in some Latin American countries, and higher infrastructure spending and higher costs due to geological complexities and lower grades in Asia. On absolute levels, however, Europe, Asia and Latin America remain the most economical regions to mine gold.
Mining costs also widely differ depending on which countries the operations are located in. Infrastructure levels, topography, geological variables (such as deposit type, metallurgy, gold grades and volume) and, of course, economic variables such as currency exchange and taxes are just a few of the parameters that determine the viability of a project. The top two producers, China and Russia, have amongst the lowest costs globally, on an AISC basis, while South Africa’s ageing mines put the country on the high end of the cost curve.
The top two producers, China and Russia, have amongst the lowest costs globally, on an AISC basis, while South Africa’s ageing mines put the country on the high end of the cost curve.
Chart 3: All-in sustaining costs by country (Q3 2021)
Source: Preliminary Company Reports, Refinitiv Metals Research
Impact of the Pandemic on Mining Costs
At a mine level, we estimate that around 6% of the more than 300 operations that Refinitiv Metals Research monitors were sub-economical during the third quarter this year, as their reported AISC was larger than the quarter’s average gold price of $1,789.9/oz. According to our findings, since the beginning of 2020, mining costs have risen the most in countries which were severely affected by the pandemic, either by high infection rates or by tight restrictions imposed by governments.
Most of these mines are located in South Africa, whose mines usually incur high maintenance costs to operate and are frequently labour-intensive. When the South African government imposed severe movement restrictions in an attempt to reduce the impact of the pandemic, several mines had to be put into care and maintenance, resulting in AISC growing by 18% year-on-year, on average. In other parts of the world, such as Mexico, some mines suffered a similar fate, with their average costs rising by 8%, as a scaling-down of operations was enforced for most industries by government.
Green Commitments
Turning to recent events, during the climax of the 2021 United Nations Climate Change Conference, several gold miners confirmed their commitment to achieve net-zero emissions by 2050. As an energy-intensive industry, several challenges lie ahead in order to achieve this goal, such as the investment necessary to improve efficiencies.
Renewables currently represent only 8% of gold mining’s energy matrix, meaning that massive investment is needed to turn gold greener and to fulfil the carbon reduction promises. This, of course, will have an impact on costs.
Several gold miners confirmed their commitment to achieve net-zero emissions by 2050
Gold ETF outflows on Track for Second-Highest Year, as Investor Appetite Wanes
Investment in gold exchange traded funds (ETFs) is on course to mark the first year of net selling since 2015, and the second highest level of sales since their inception. Net outflows of 39 tonnes were reported in the third quarter, which was in sharp contrast to significant inflows registered during the same quarter of last year, when investors added 283 tonnes to their holdings. This also represented the second quarter of net selling so far this year, with total outflows estimated at over 190 tonnes during the first nine months. To put this into context, ETF investors added over 1,000 tonnes of gold between January and September 2020, pushing global holdings to a fresh high in November.
Outflows from ETFs were driven by a general rise in optimism and a gradual return of confidence, following the big economic shock caused by the pandemic last year. This saw investors pursue higher yields, putting pressure on gold prices. In addition, a continued recovery in the global economy, along with mounting inflationary pressures, prompted fears that the US Federal Reserve might start raising interest rates sooner than previously expected, which weighed on investor sentiment towards gold.
A regional analysis reveals that Q3 selling was concentrated in North America, which was, in fact, the only region to register net outflows, of nearly 58 tonnes or down 3%, during the quarter.
European-listed funds added 12 tonnes or up 1% over the three-month period, while Asian funds experienced the largest increase in percentage terms, with holdings growing by 4%, although only by six tonnes in absolute terms.
Gold ETF selling continued into October, with outflows estimated at 34 tonnes. This represented the third consecutive month of liquidation, with net selling over the ten-month period equivalent to just under 230 tonnes.
Mining gold in Latin America and Asia costs nearly twice as much as it did back in 2010, while costs in Europe have increased by only 10%.
Chart 4: Monthly change in gold ETF holdings
Source: Refinitiv Metals Research
Chart 5: Gold ETF holdings by region
Source: Refinitiv Metals Research
It is worth adding though that despite a shift in investor sentiment, the ongoing economic recovery and the central banks’ rhetoric turning slightly hawkish, gold ETFs have remained relatively resilient this year. Global holdings as of early November are estimated at less than 10% below the all-time peak of nearly 4,000 tonnes registered in the fourth quarter of 2020.
Looking ahead, we expect investors to remain cautious for the remainder of the year, while fresh purchases are likely to stay limited. As such, gold ETFs are set to register net outflows of over 200 tonnes in 2021, which would mark the first year of net selling since 2015 and the second-highest level of annual outflows since the inception of gold ETFs in 2003, with the largest net annual selling of 876 tonnes witnessed in 2013.
Investment in gold exchange traded funds (ETFs) is on course to mark the first year of net selling since 2015, and the second highest level of sales since their inception
