Several days ago we reported that as a result of persistently lower gold prices, driven down by a seemingly endless supply of paper gold (in the form of ETF selling and Bank of International Settlement “price discovery”) offsetting a seemingly unbridled appetite for physical gold, not only is one of the biggest marginal suppliers of gold – Chinese producers – about to take an extended hiatus, but first one and then many “developed” gold miners are about to throw in the towel.
As UBS' Shanghai analyst Lin Haoxiang said, “Falling prices are cutting into some high-cost private mines in China, while some big miners chose to reduce costs by reducing jobs and capital investments.” As for the North American gold miner defaults, they have already started with Canada's San Gold (SGRCF) warning its creditors it is about to stuff them with a lot of unrepayable paper.
However the unwind plays out, it is becoming increasingly clear that just as the crude oil market is set for some violent times ahead as producers lock into the defection phase of the Prisoner's Dilemma and flood the market with supply in an attempt to crush the weakest competition, so the gold market is set for many upheavals, the first of which, however, may be what Goldcorp (GG) defined in a recent slideshow as Peak Gold.
The only difference is that Goldcorp does not look at it from the perspective of Game Theory, where it is every miner (and their balance sheet) for themselves, but as a function of a 20 year lead-in development time following the period of peak gold discovery which took place in 1995. End result: “Gold market forecasters are expecting peak production in ~2015.”
Click on picture to enlarge
And then there are of course, the practical implications of gold miners who are living if not on borrowed time, then close to it. As the following chart of the gold industry's “all-in sustaining costs”, when one takes net debt and the interest due on it into consideration, it becomes clear why gold has managed to find the $1050-$1200 region as support: drop the price of gold below that and suddenly 90% of the entire gold industry becomes unprofitable.
