All eyes in the precious metals industry are on the mega-merger between mining giant Barrick Gold Corp. and rival Randgold Resources Ltd. The all-share deal, announced yesterday, will make Barrick into the world’s largest gold company by production when the deal closes in the first quarter of next year. Markets reacted positively to the news, with shares of both companies up slightly more than 5%.
Pease and Curren’s customers are wondering what this means for them. We see two key takeaways.
Barrick’s decision to acquire additional gold mining capacity signals its confidence in a rising gold market. Colin Cieszynski, chief market strategist at SIA Wealth Management, observed , “Barrick wouldn’t have made this move if they thought prices were going to be lower a year from now.” Jeff Klearman, portfolio manager at GraniteShares, agrees: “It looks like these companies are positioning themselves to take advantage of a stronger gold market in the future,” he said.
Over time, as humanity takes advantage of the world’s most accessible gold reserves, profitable mining becomes more and more challenging. The average grade of ore being exploited today is roughly one-tenth of what it was in the 1960s, such that companies must process massive batches of ore to find teaspoons full of metal. Miners need to pool their resources and expertise to operate profitably in this low-margin space. Barrick, for example , has used sophisticated data analytics to cut its operating costs and focus on the richest veins, turning a $10 billion loss in 2013 into a $876 million profit last year. Larger entities can bring more influence to bear in a time when governments are demanding a bigger share of the profits from their national resources.
However, no amount of expertise or influence can reverse the trend that the world’s ore is increasingly sparse and difficult to exploit. In the long-term, supply challenges will inevitably create a floor on the price of gold. Industry will rely increasingly on recycled material.
Although the structural signs point to a rising gold price, they provide no prediction as to when increases will occur or how volatile the market will be. Customers should refine after accumulating sufficient material, regardless of the gold price. When the market goes up, customers holding unrefined scrap will have to wait for their material to be processed before realizing the gains, and may not be in a position to pull the trigger when the market peaks. If a customer doesn’t like today’s gold price, they can use Pease and Curren’s refine and hold option, or take their settlement in pure gold bars or grain. Keeping unrefined scrap lying around is never a solid investment strategy.