ANALYSTS TOTALLY WRONG ABOUT GOLD: Top Gold Miners Production Cost Still Provides Floor In The Market Price

While the debate on the dynamics of the gold market continues, at least the top gold miners production cost provides us with a floor price.  Or rather, a basic minimum price level.  I get a good laugh when I read analysts suggesting that the gold price will fall back to $450-$700.  For the gold price to fall back to $450, then we would need to lose 95+% of global gold mine supply.

Due to two factors of rising energy prices and falling ore grades in the gold mining industry, COSTS WILL NEVER go back to where they were a decade ago.  Again, the only way for that to happen is if a large percentage of gold mine production was shut down.

Furthermore, analysts continue to wrongly forecast the gold price based mainly on gold supply and demand forces.  This is a NO-NO.  The overriding factor that has determined the gold market price has been the gold mining industry cost of production.  I proved this point by showing the increase in the gold production cost at Homestake Mining (the United States largest gold mine 1970’s) from 1971-1979:

Homestake Mining was producing gold at the cost of $42 an ounce in 1971 when the average price was $40.80.  Thus, Homestake Mining lost money producing gold in 1971.  However, as energy-driven inflation ravaged throughout the economy as the price of a barrel of oil increased from $2.24 in 1971 to $31 in 1979, this impacted the cost to produce gold significantly.  By 1979, Homestake Mining’s gold production cost jumped to $247 an ounce.

While it is true that the tremendous demand for gold by investors also drove the gold price to new highs in the 1970s, we can see that at least 80+% of the increase in the gold price from 1971-1979, in the case of Homestake Mining, was due to higher production costs.

So, what is taking place currently in the top gold mining industry as it pertains to production costs?

The Top 5 Gold Miners Total Production Cost Remains Above $1,200 An Ounce

According to my analysis of the estimated adjusted income breakeven of the top five gold miners, the average weighted cost was $1,204 an ounce for the first nine-months of 2018:

As we can see, Goldcorp has had a horrible year as their adjusted breakeven gold production cost was the highest in the group at $1,281.  AngloGold had the second highest cost at $1,257, followed by Barrick ($1,207), Kinross ($1,186) and Newmont ($1,144).  Now, the weighted average breakeven price of $1,204 was based on an average gold price of $1,282 for Q1-Q3.  So, the top five gold miners average profit for the group was about $78 an ounce during the first nine months of 2018.

However, gold production costs increased by Q3 2018 as the oil price jumped to $70 a barrel during the quarter while the gold price fell.  So, profits declined in the third quarter.  Regardless, we can see that the total production cost of the top gold miners at $1,204 provides a base for the current market price of $1,221.

Now, some analysts, investors, and readers may disagree with my “estimated break-even gold price,” but if we use another metric, we see similar results.  Because the gold mining industry is extremely capital intensive, it takes a massive amount of capital funds to sustain production; we can look at the Free Cash Flow as a guide.

To arrive at Free Cash Flow, we subtract the gold mining company’s CAPITAL EXPENDITURES (CAPEX) from their CASH FROM OPERATIONS.  Here is an example of Barrick’s Free Cash Flow by looking at the Cash Flow Statement in their Q3 2018 Report.  Barrick reported cash from operations of $1,354 million while spending $1,026 million on CAPEX during Q1-Q3 2018, netting $328 million in positive free cash flow:

In the first nine months of 2018, the top five gold miners combined net Free Cash Flow was $542 million.  While that is a nice chunk of change, the five gold mining companies produced 13.2 million oz of gold.  By dividing the $542 million in free cash flow by the 13.2 million oz of gold production, the group made a net $41 of free cash flow per ounce:

So, my estimated profit for the group Q1-Q3 2018 was $78 per ounce while their Free Cash Flow per ounce was $41.  While it’s not an exact science, we can see that the gold miners aren’t making money HAND-OVER-FIST producing the best quality store of value and money on the planet.

Of course, some analysts would suggest that some of the CAPEX the gold miners are spending are for replacing reserves and adding new projects-mines.  Maybe this is true, but if so… SOMEONE NEEDS TO TELL THE GOLD MINING INDUSTRY.  Why?  Well, if we look at the next two charts, the CAPEX the gold miners are spending most certainly isn’t replacing or growing production.

As we can see, production from the top four gold miners has continued to decline even though they are supposedly spending money to replace and grow production.  The gold mining industry separates CAPEX spending into two categories:

  1. Sustaining CAPEX
  2. Expansionary CAPEX

Well, we can clearly see that the “Expansionary CAPEX” that these gold miners publish in their financial reports doesn’t seem to be expanding production.  Now, if we look at what is taking place in the top five gold miners over the past three-quarters, the trend continues:

Total gold production from Barrick, Newmont, AngloGold, Kinross, and Goldcorp fell from 14.9 million oz Q1-Q3 2017 to 13.2 million oz during the same period this year.  That is an 11% decline in production in just one year.  So, what’s going on with all the expansionary CAPEX spending?  Ah??

Now that we have an idea of what it costs to produce gold from the top gold miners, why are the forecasts of $450-$700 incorrect?

Harry Dent’s $450 Gold Price Neglects The Number One Factor Of Price

Harry Dent became famous due to a few forecasts that he got right out of 1oo.  However, his ongoing predictions for $450-$700 will never come true because Harry neglects to incorporate one of the most important factors in determining the gold price… COST OF PRODUCTION.

While Harry continues to write about the coming deflation and why the gold price would not do well, Charles Nenner has stated that the gold price actually does well during deflationary periods.  So, which is it?  Well, in the future, past analysis won’t matter as much due to the collapse of global oil production and its impact on the value of most assets.

But, if we look at Harry Dent’s chart on the future gold price, we can see that something has gone horribly wrong with his forecast:

Harry Dent’s forecast of the gold price made back in April 2017 is shown in the small white graph at the upper left corner of the chart.  According to Harry, the gold price should have dropped to $700 by the middle of 2018, corrected higher and then was projected to continue falling to $450 by 2020.  So far, the gold price has remained above $1,200 an ounce, even reaching $1,350 at the beginning of 2018.

Dent used technical analysis and the popping of a TYPICAL BUBBLE to arrive at his gold price targets of $700 and $450.  Unfortunately, basing one’s forecasts on technical analysis only is a huge mistake because you have left out the most important ingredient… ENERGY.

My chart shows that the gold price has increased since the low at the beginning of 2016, due to HIGHER ENERGY PRICES:

The oil price fell to a low of $43.29 a barrel in 2016, thus pulling down the cost to produce gold.  However, as the oil price increased to $67.55 in 2018, it impacted the gold miners production cost.  But, there is something even more important if we compare the oil price and gold production cost in 2004 versus 2016.

Here is a chart of the top two gold miners, Barrick and Newmont, estimated break-even cost since 2000:

In 2004, the top two gold miners estimated total production cost was $366 based on a market price of $410.  However, by 2016, Barrick and Newmont’s combined production cost increased to $1,123 per ounce.  What is quite fascinating is that the oil price in 2016 at $43.29 wasn’t much higher than the 2004 average oil price of $41.51.  So… WHY WAS THE  GOLD PRODUCTION COST THREE TIMES HIGHER in 2016 versus 2004, while the oil price was only a few bucks higher???

While it is impossible to understand all the valuables why it cost so much more to produce gold today than it did 10-15 years ago, I believe the Falling EROI – Energy Returned On Invested is the main factor as it has THUNDERED throughout the entire economy.  It doesn’t matter if the oil price falls back to $30, it will not lower the overall cost to produce gold all that much.

So… HARRY DENT, it’s time to update your analysis.

In future articles I will explain with the gold price will likely decouple from the ENERGY COST ANALYSIS due to the collapse in the value of most assets as global oil production plummets. 

Lastly… as forecasted the CRYPTO MARKET Continues to drop to new lows.

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39 Comments on "ANALYSTS TOTALLY WRONG ABOUT GOLD: Top Gold Miners Production Cost Still Provides Floor In The Market Price"

  1. As always nice work Steve!

  2. World miners only produce 8.7 times more gold than silver per year !!! and Silver Demand outstrips supply
    take about huge Bullish setup coming for the silver

  3. Mining accounting seems to be a lot of smoke and mirrors. Is it fair to assume that the “finance cost” $440m is, in fact, a cash infusion from borrowing to the tune of$440,000,000? If so, how can this be considered free cash flow? $440-$338m=-$112m that is negative $112m cash flow. Could debt be the major difference in per ounce costs?

    • SteveW,

      While I agree with you that fancy financial accounting has made it quite difficult to really know what is going on in the gold mining industry, or any industry for that matter, the best we can go by is what is reported.

      Now, the $440 million that Barrick paid in finance cost was deducted in their Net Income statement, which is why they add it back into the Cash Flow Statement. Also, the Depreciation, Depletion, and Amortization of $1,016 million was also added back in the Cash Flow Statement because it was also deducted from the Net Income statement.

      Yes, it all seems quite OBTUSE, but that is how they calculate their CASH FLOW.

      This is precisely why I use “ADJUSTED EARNINGS” in calculating my Estimated Break-Even price. Barrick reported a $492 million loss on their net income for the first nine months of 2018 due to an impairment write-down of one of their mines. Now, while this does impact the bottom line for Barrick, I see it as separate from the ongoing DAY TO DAY COST of producing gold. Thus, I used Barrick’s $340 million of adjusted income for Q1-Q3 to arrive at my estimated breakeven, disregarding the impairment because that impairment could be reversed as the gold price moves back higher.

      So, while it is a tricky thing to calculate a realistic production cost for the gold mining industry, at least my analysis has shown that the estimated breakeven has provided a BASIC FLOOR market price for gold.


  4. Hi Steve,
    Just following up with you to see if you are now receiving my donation of $5 per month from patreon. I did receive an email from them mentioning that you had a recent post for me to look at. Nothing since then. Just want to make sure you are receiving your money.
    Thanks again Steve. Good job.
    Dan Schafers

  5. Let’s not forget, you were never a big fan of crypto… many of us do read, learn and appreciate.

    • Kuggie,

      Early on, I thought the Crypto Market offered an interesting alternative. However, as I became more involved and saw the massive fraud and bubble forming, I knew it wasn’t going to end well. My associate and I have been discussing the Crypto market for the past few years and came to the conclusion that it will likely go the same way as the BEANIE-BABY.

      We ultimately see Bitcoin falling to $1,000 and below. However presently, there is no support for Bitcoin until it reaches the next support level between $2,500-$2,800, depending on which chart you are using. So, I would not be surprised to see Bitcoin fall to that level quite quickly. Of course, we could see a bit of a rally first as nothing goes down in a straight line.

      But, my associate and I agree, that by the end of 2019, most investors in the Cryptos will be GONE FOREVER. And, that is a good thing so we can get back to focusing on the best quality stores of value… GOLD & SILVER.


  6. I just wonder if Harry Dent admits that gold price is manipulated ??
    He must be keeping a lot of dollars in “Bank” and few Bitcoins too ,it’s much better idea than buying Gold for himself. Good luck!!

  7. Michael Kohlhaas | November 24, 2018 at 9:41 pm |

    Please, don’t mention this frigging weasel Harry Dent anymore! What a frigging assswipe!

    • When it comes about Harry Dent, I remember the old saying: “Human mind can go deeper and deeper yet still can not find the truth”.

  8. Well done analysis IMHO Steve. I just don’t find this type of research anywhere else. Job well done!

  9. Harry recently moved the goal posts on gold in a podcast wealth Global Wealth Portfolio. He now believes gold won’t drop below a $1,000 per troy ounce and will rise as safe havens take the stage and emerging markets shine, again. Mergers in the big producers should tell us something significant; the ability to produce a profit with these prices is forcing consolidation. I could only imagine the unforeseen consequences affecting the gold price if a major, banking institution like Deutsche fails.

    • Jessy James,

      While Dent might have correctly CHANGED HIS FORECAST on the Gold Price, his analysis suggesting the Emerging Markets will shine once again shows his lack of knowledge on ENERGY, the FALLING EROI, and the THERMODYNAMICS of resource depletion. The Emerging markets will be in just as bad or in a worse shape than the Mature Markets as the Oil-Debt-Driven Market collapse phase moves into high gear.


  10. In the first paragraph, you wrote “For the gold price to fall back to $450, then we would need to lose 95+% of global gold mine supply”. I don’t quite understand this. Why would a massive price decline require massive decrease in gold mine supply? Wouldn’t diminishing supply actually cause the price to go higher?

    • Jonathan,

      As I mentioned to another commenter, I will be writing and producing future articles and videos on this subject matter to hopefully clarify my analysis.

      However, to answer your question, Why would a massive price decline require massive decrease in gold mine supply? Wouldn’t diminishing supply actually cause the price to go higher?, I state the following:

      While the market has been brainwashed to believe that SUPPLY & DEMAND forces are the overriding factors in determining the price of a good, commodity, metal or etc, the overwhelming factor has always been the COST OF PRODUCTION based on the Thermodynamics of resource depletion. Supply and Demand forces only move the market price above or below the COST OF PRODUCTION TRENDLINE.

      Once the market realizes this economic principle, we can then move forward to understanding how the value of GOLD & SILVER will play out in the future.


      • Steve,

        That I understand and agree that cost of production (major part is energy), is a major component of price which is often ignored. However, why would a 95% mine loss would lead to that? If energy prices drop, it can still be economical to mine gold in some mines at a profit, and wouldn’t necessarily mean you have to shutdown mines. If ore grade drops significantly in years to come, even with dropping energy costs, you may still need to move/process more ore in order to get the gold which can translate to higher production costs.

        Isn’t the original statement too much of a generalization?

        • Jonathan,

          All I said was that if the gold price fell to $450 an ounce, and stayed there, then 95% of the gold mining industry would have to shut down. You must remember, I stated that the top two gold miners production costs jumped THREE TIMES to $1,123 an ounce in 2016 versus 2004 at $366 an ounce even though the oil price was a few dollars higher.

          So, the oil price alone is not a good indicator of the cost now. We must also include the factors of Falling Ore Grades and the Falling EROI of the entire gold mining supply chain.

          Lastly, while the production cost may still provide a basic level for the gold price in the future, it will no longer be the determining factor because 99% of the assets in the world will become SHYTE.


          • “All I said was that if the gold price fell to $450 an ounce, and stayed there, then 95% of the gold mining industry would have to shut down” – ah, ok. I think I misunderstood it the first time. Makes perfects sense.

  11. Steve,
    One of the original and prime purposes of the futures & options markets is to allow producers of commodities to hedge risk. If this is done correctly Gold producers should be able to keep producing and even profiting if price falls below cost of production. Do you have any indication of how low price can go below cost of production before this strategy fails?

    • Brian,

      It will be difficult to forecast market prices in the future when U.S. and global oil production plummets, and it will. The futures & options market only works when there is a positive EROI of energy, which has been the case for thousands of years.

      According to my analysis, the gold market price has not fallen too far below the primary gold mining industry’s cost of production for the past 50+ years. While some years, the gold production cost was lower than the market price, it may have only been a difference of say 2-5% +/-. However, my analysis also suggests that the market price has been higher than the production cost for the majority of the time. And it had to be, or the gold mining industry would not have been able to increase production.

      I don’t believe the gold market price will fall considerably below the primary miners’ average production cost from here on out. However, for my readers to understand why I forecast much higher prices going forward, I will need to write and produce several articles and videos to explain the details. Of course, I could be wrong in my analysis, but if we realize the overwhelming majority of assets, STOCKS, BONDS, & REAL ESTATE that comprise 99% of the market, will see their values evaporate during the next OIL-DEBT-COLLAPSE DRIVEN MARKET, logic suggests gold and silver will be the few high-quality safe havens in the future.


  12. DisappearingCulture | November 25, 2018 at 5:31 am |

    It’s a very thoughtful, well presented article Steve.

  13. It will be interesting to see whether the continued fall in available net energy to the economy will push down all commodity prices including PMs. I look forward to your reasoning why gold will not fall to.

  14. Billy Lone Bear | November 25, 2018 at 10:56 am |

    Cost of production is a factor left out of analysis too often. Thanks Steve.

    IMHO the current price of gold is a bullish argument for silver in that gold is still being mined almost entirely for monetary insurance purposes (so why can’t silver) and people are paying $1200+ for a piece of shiny metal (so paying $150 for silver in the near future isn’t too much of a stretch when the chips are down and Gold goes 2x to 5x it’s current price)

  15. Why dont miners pay their employees in gold and stockpile(withhold from market) until a price change ?
    My guess, its near impossible for mutual cooperation.

    • DisappearingCulture | November 25, 2018 at 3:08 pm |

      The reason they pay employees in dollars or the currency of the country the mine is in, is currency is the medium of exchange people use to pay their bills/food/expenses.
      You may not have ever owned/run your own business. Simply stated, mines need the income from selling their products [all of it] to pay business expenses & stockholders [investors]. Few business operations can afford to just sit on their products.

  16. Gold is a store of value, but exactly what value is being stored?
    Typically value is the output of labor and capital, both of which are energy intensive.
    Petroleum is a store of energy with value, which is released when the gold miner invests in time, effort, labor, equipment, and materials. When the miner sells a gold bar for currency, the currency represents the stored energy that went into producing the gold bar.
    The trouble comes at present, when the currency is being devalued, along with a steadily falling EROI of petroleum.
    Whereas the stored value in the gold bar remains as a desirable “store of value”.

  17. You can think of the metals as having both a price floor that is the cost of production, and a price ceiling that is the value that people accept before they liquidate into fiat. This can happen in a variety of ways:
    1) merely be a rise in price, which causes selling pressure as we saw in 2011/2012
    2) overt manipulation by the bullion banks such as the 2013 crash
    3) rising interest rates which makes saving in fiat more attractive (currently)

    You guys are mistaken if you believe gold will sustain a major bull market, much less a revaluation, which is the view of that moronic imp FOFOA. Even I have given up on gold. I just want some as insurance.

    • Robert Happek | November 26, 2018 at 6:40 pm |

      The price of gold is managed by central and other banks. Gold is THE competition for fiat paper. In order for the masses to believe that gold is a poor investment, the price of gold is managed to be close to the cost of production. Look at the long term chart of gold. From 1981 to 2001, a perioud of 20 years, gold fluctuated around $400 per ounce. Starting with 2001, gold was allowed to rise from $400 to $1,900 in 2011. At that time, banks decided a new equilibrium to be around $1,200. The gold price has been fluctuating around that price since then. Nobody knows when a new price rise will start. Perhaps in 2031 or sooner ? But it is certain that the price will start to rise again, at the latest when physical demand will overtake mine production. The point I am trying to make is that all price stagnations of precious metals are intentional and temporary designed to convince many people that paper is better than gold. The concept of positive interest rates was needed to support paper versus gold. The greed of investors allows them to be fooled that a bond investment is better than gold because of the positive interest rate associated with the bond.
      Our host Steve correctly realized that economic growth leads to a depletion of all natural resources. Economic growth has therefore a finite lifespan. That means the positive rates of return are not sustainable. That is the reason why Voltaire has said “all paper falls down in time to its intrinsic value which is zero”.

  18. Bitcoin has crashed by 90% four times since it began and four times soon thereof it exploded to the upside. Everyone then believed it was over for the cryptos and have been proven wrong 4X. This will be No 5

    What’s happened to Gold and Silver, how many years now???

    • DisappearingCulture | November 26, 2018 at 12:27 pm |

      You need to study the chart of Bitcoin’s value more closely. It has not “exploded to the upside” four times.
      It has been in a declining trend since it’s manic bubble peak around mid December of 2017.

      • DC, It has declined then exploded higher several times(fact) – do you deny that??

        Of course this site belittles cryptos because it supports precious metals, Steve criticizes Dent but fails to see his own errors about energy and metal supply, told him 5 years ago nothing would happen and I’m telling you it will be another 5 years before if at all begins, meanwhile I’ll continue buying my LTC and holding onto my 5000% margin in my stocks till I’m ready for the next move.

        I love it when most of you become fearful, that’s when I become greedy. Good Luck 😉

    • DisappearingCulture | November 26, 2018 at 3:34 pm |

      Bitcoin has been in a strong downward trend since it’s manic bubble high in mid December 2017. There have been no “explosions to the upside” since it’s high then of around $18,700 and its current $3,750.

      • match it to your btc chart

        06/11/11 to 11/21/11: -94% High: $35, Low: $2
        04/10/13 to 04/12/13: -83% High: $260, Low: $45
        11/29/13 to 08/15/15: -87% High: $1140 Low: $150
        12/17/17 to ??/??/??: -82% High: $19900 Low: $3540

        • DisappearingCulture | November 27, 2018 at 10:23 am |

          OK; fair enough…although prior to it’s manic mid December 2017 high.
          I have a friendly $1 bet with a friend that Bitcoin has seen it’s all-time high, and will never approach that again. Would love to have some more serious bets on that.

  19. Oh Yes – Bitcoin still going to over $100,000 — Buy Buy Buy! I mean BYE !!! Don’t
    worry, you can still keep your wallet. 🙂

  20. Mr. Dents prediction may be more valid than you might think, Steve: In distorted markets like the current ones, cost of production doesn’t count any more when central banks print money like crazy just to keep the zombie companies alive, so they would have otherwise collapsed (bankruptcy). In such a scenario there is an absolute possibility that the nominal price can fall below the price of production over an extended period of time without disruptions in product chains: product remains available, even it normally couldn’t. They can keep it as long as the currency devaluation doesn’t reach critical levels (confidence) [1] or they ran out of the resource. The hard awakening will come afterwards with a bang but it won’t matter any more at this time.

    Please don’t get me wrong: In normal situations I’m totally on your side, but current times aren’t normal any more.

    [1] When all currencies globally are devalued in lockstep, you can’t destroy the confidence, because there is no escape (imprisonment). Even the gold-silver-window will soon be closed… hurry up!

    • DisappearingCulture | November 26, 2018 at 3:39 pm |

      No. Your scenario can’t happen. Why? For one reason Chinese and Indian demand would collapse the COMEX and LBMA. The function of the COMEX is to maintain the gold price in a range, including not too low.

  21. Whenever you hear “analysts” discussing gold and silver, one point is always brought forward, that of silver being volatile in price movement. Had a look at weekly gold and silver price charts lately?
    Silver has chopped sideways in a narrow $4 trading band for the past 26 months! Over 2 years.
    While gold over that same time frame, has been the more volatile of the two.

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