Here’s How a Decline in Gold Production Could Remain an Upside for Gold Producers

by Trefis Team
+7.15%
Upside
13.58
Market
14.55
Trefis
ABX
Barrick Gold
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With three U.S. interest rate hikes in 2017 and additional increases in the key policy rate anticipated in the next two years, there seems to be an unfavorable prospect for gold prices in the upcoming years. However, declining gold output over the same time frame is most likely to support gold prices while other fundamentals for gold remains gloomy.

Gold is largely considered a safe haven asset from an investment point of view, with macroeconomic or geopolitical uncertainty driving the investment demand for the yellow metal. Demand for gold as an investment is inversely related to the U.S. interest rate. Rising interest rates would most likely drive investors towards other asset classes such as fixed income investments as they become more attractive.

However, contrary to this pessimistic outlook, global gold output is expected fall over the span of the next 5 years which is likely to provide support to future gold prices. A decline in gold prices during 2012 to 2015 had reduced the exploration and development spending by gold miners which is anticipated to adversely impact gold output in the upcoming years. Gary Goldberg, CEO of Newmont Mining, expects global gold supply to fall by 7% by 2021 due to the aforementioned reason.

Below is the production outlook released by two of the major gold miners, Newmont Mining and Barrick Gold. The declining trend in gold output supports our projection of falling global supply. You can view our base case for gold production here and create different scenarios using our interactive platform.

On the demand side however, a rise in the disposable income of two of the largest consumers of gold, China and India, would translate into steady demand for gold.  Thus, a fall in gold supply coupled with a consistent demand, would result in enhanced gold prices.

Therefore, despite a general pessimistic outlook on the prices of gold, we believe that a supply deficit would provide support to the price of the yellow metal to a certain extent. This would benefit Newmont and Barrick in the upcoming years and enable them to re-direct their cash flows into mine exploration and development projects to meet future gold demand.

Have more questions about Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for gold mining companies, including Newmont Mining and Barrick Gold.

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