Low gold prices have been holding back miners from going full throttle in search of elusive "world-class" deposits. Could that change with the precious metal trading at record high prices?
Gold prices have risen more than 20% this year to touch all-time highs, as low yields and central bank stimulus drive investors toward the precious metal.
The yellow metal soared to a record high of $1,944.71 per ounce on Monday, well above its previous record of $1,921.18 seen in 2011 — with demand also supported by worsening US-China relations and worries of delayed and uneven economic recovery amid rising coronavirus cases in several parts of the world, which have reinforced gold's safe-haven appeal. Gold has been the best-performing major asset class this year.
The collapse in interest rates and bond yields has made holding gold attractive, Adrian Ash, director of research at investment firm BullionVault, told DW. He added that "rising inflation expectations, driven by unprecedented peacetime [fiscal] deficits plus central bank stimulus," make the precious metal, which is considered as a hedge against inflation, an appealing alternative to cash or credit investments.
The demand for the precious metal has mainly been driven by record inflows in gold-backed exchange traded funds (ETFs) — investment funds that trade like stocks and replicate whole indices — which offset falling demand for physical gold in key markets such as China and India.
Gold ETFs attracted inflows of 734 tons — equivalent to $39.5 billion or €33.7 billion — in the first half of this year, which pushed global holdings in these products to new all-time highs of 3,621 tons, World Gold Council data showed. Gold ETF inflows in the first six months have surpassed the largest annual gain of 646 tons seen in 2009.
"The factors that have driven demand for gold in the first half of the year are not going to change much in the second half," John Reade, chief market strategist at the World Gold Council, told DW.
The surge in gold prices would allow gold miners to loosen their purse strings and spend on boosting production, possibly on the exploration of new mines, after years of cost cutting amid declining prices. Global exploration budgets have more than halved from their 2012 highs of around $10 billion.
In the past few years, gold miners have turned their focus away from growing production at any cost to focusing on economic metrics like free cash flow generation in the face of investor pressure.
They have also struggled to discover new deposits to replace the lost production, prompting several experts and industry magnates to forecast a perpetual decline in gold production from its current peak.
The rate of gold mine discoveries has declined over the past three decades, World Gold Council figures show.
Among the new discoveries, there have been hardly any that experts call "world class" deposits. These are typically large high-grade deposits with over 5 million ounces of gold reserves that can be turned into profitable mines capable of producing over 250,000 ounces of gold. The average grade of the new gold deposits — the amount of gold that can be extracted per ton — has also been declining.
Junior miners are starting to benefit from the gold rush. American Pacific Mining with market capitalization of less than $20 million, for example, recently raised $3 million — six times more than it had initially planned
But there are others who blame low gold prices for fewer discoveries, while stressing that the world is not running out of gold. They say higher prices and technological advancements would help push miners to explore new frontiers for the precious metal, including the seabed and possibly even asteroids.
Currently, Australia, Canada and the United States absorb 40% of global spending on exploration. Miners could now potentially turn to riskier, less explored countries in Latin America and Africa.
Mining majors have stayed away from exploring for greenfield mines over past decade, focusing instead on older, known deposits, the so-called brownfield projects.
They have relied on junior miners or smaller miners to search for greenfield mines. But the smaller miners have struggled to convince investors to take a punt on them. That seems to be changing with the rise in gold prices, which is prompting increasing investor interest in the juniors.
Matthew Miller, vice president at CFRA Research in New York, expects exploration budgets to increase, but he does not think it would have any meaningful impact on the gold mine supply.
"We think we have already entered the era of "peak gold" and there is very little that gold miners can do to change it," he told DW. "At $2,000 per ounce gold, CFRA thinks it opens up new exploration frontiers, but most miners would need to see a sustained higher price to commit capital to higher-cost projects and therefore, we are unlikely to see a significant increase in exploration success."