Average gold mining costs fell 14 percent in the third quarter from the second quarter and were down 1 percent from last year, according to Barclays, while gold prices have fallen 9 percent in the past two months.
Tyler Broda of Nomura said Friday that the Fed’s discussion of a possible cut in its $85 billion-per-month bond buying has driven sentiment, and high interest rates have encouraged disinvestment in gold. Second, a lack of rebound in Indian gold imports has outweighed another year of record Chinese demand.
“We remain bearish on 2014 prices on the margin, but the magnitude of the 2013 moves is starting to set the base for the next cycle, in our view,” Broda said.
The fall in prices seems to have given gold producers extra pressure to reduce costs of production, and despite increases in some underlying costs of production in a few key regions, gold producers have been largely successful in cutting costs.
In the third quarter, cash costs for gold fell to $654 per ounce from last quarter’s average $764 per ounce, well below current prices at about $1,200 per ounce, according to Barclays. Costs are highest in South Africa ($928 per ounce), where producers agreed this year to wage increases of 7.5 percent to 8 percent. Costs are relatively low in Indonesia ($414 per ounce), Russia ($515 per ounce) and China ($549 per ounce).
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“Among other moves meant to cut costs, producers disposed of certain operations and drove down administrative costs,” Christopher Louney of Barclays said Friday. “While these moves have been largely successful, as evidenced by a step down in costs across the entire curve, a sustained downward move in cash costs is unlikely to extend over the long term, in our view.”
That’s because most costs have not fallen due to better grades, better technology, or falling labor or electricity costs, all items that would suggest a more long-term improvement in costs.