The key to finding gold is understanding the rocks. Thomas Schuster is a geologist and mining analyst with a deep understanding of where the gold hides. In this interview with The Gold Report, he talks about a number of gold explorers whose rocks are starting to shine. And gold is ready to come back strong, he says, as global reserves melt away.
The Gold Report: Thomas, the price of gold sank in October even as the stock market was rebounding. Can gold also rebound?
Thomas Schuster: Gold will rebound, it always has and always will. The mining market is almost violently cyclic. Deep lows are followed by spectacular highs. The tough question is when will the gold price rebound happen? There are a lot of nay-saying precious metal bears in the market right now. Many forecasters are predicting that gold will continue to trade within a narrow range—around $1,100–1,225/ounce ($1,100–1,225/oz) over the next few years.
But the fact is, on a global scale, we are not replacing reserves as fast as we're mining them. That simple fact supports only one outcome: higher prices. A recent reporton gold production by SNL Metals & Mining observes that when we look at the amount of potential future production from major discoveries made over the last 15 years, we could only replace, at best, 50% of gold produced during that same period.
The report also points out that the average time to bring a newly discovered mine into production has been significantly increasing. For mines that went into production between 1985 and 1995, the average wait was eight years from discovery to production. For mines that went into production between 2006 and 2013, the average wait is 18 years.
There are many reasons for this—more details are needed in feasibility work-ups, there are more stringent social and environmental standards, and more demanding permitting processes. Many of these mines are of lower grade. They are more remote, and require lots of capital for developing infrastructure and processing capacities. The capital market is poor at the moment; it is difficult to raise money and it takes more time to move into production than it did before.
TGR: Why was gold so high previously and what happened to the price, in your opinion? Why was it so high, and why did it fall so far?
TS: I believe that a combination of growing U.S. debt, a weaker U.S. dollar, increasing inflation fears and the fact that many foreign central banks, especially in the BRIC countries—Brazil, Russia, India and China—were buying gold as a hedge, helped drive the gold price up, creating a speculative bull market in precious metals. Now, the U.S. dollar appears stronger (at least when compared with other currencies), we are told inflation is less of a threat, and interest rates may begin to rise in the next year.
The central banks are still buying gold but not in the quantities they were in previous years. Add to that the fact that resource stock performance has been very poor over the past few years and investor sentiment has turned against precious metals. These, in my opinion, has all helped to push the prices down.
TGR: Have Federal Reserve actions controlled the price movements of gold, silver and copper?
TS: The driving force behind the recent drop in gold and silver has been the Federal Reserve's asset purchases and its hints at raising interest rates. This has strengthened the U.S. dollar and signaled investors to dump gold. Hedge funds typically lead the way.
TGR: What was the advantage of quantitative easing for gold?
TS: When interest rates are below the inflation rate, the market is generally bullish for precious metals. Fed chair Janet Yellen has indicated that job growth takes precedence over fighting inflation. When inflation takes hold, as I believe it inevitably will, there will be another gold bull run because I doubt interest rates will be able to keep up.
TGR: Is the cost of production of the precious metals affecting prices?
TS: A recent Bank of Montreal report has estimated that at $1,200/oz gold, nearly 40% of current gold production that BMO follows is not profitable on an all-in cost basis. The bank estimates that on a global basis as much as half of the world's gold production is unprofitable. I like to look at real costs rather than cash costs or other variations. Real cost is taking total revenue and subtracting it from cash from operations and dividing by the number of ounces sold. Those figures are easy to find on an audited balance sheet; it levels the playing field between companies.
Instead of closing operations in difficult markets, mining producers tend to cost-cut in order to improve their bottom lines. They typically mine the higher-grade portions of a resource and lower the amount of sustaining capital that would normally go into operations. They also curtail mine expansion and exploration. If the cost cutting measures are effective, the overall costs come down and profits look good for a little while. This is a quick fix and is not sustainable over the long run.