Marcus Grubb
Managing Director, Investment
World Gold Council
View from the Top

Momentum for Gold Mining Investment

Mon, 10/21/2013 - 15:09

Q: What is the importance of gold in today’s global economy?

A: Gold plays a vital and diverse role in today’s global economy. Gold jewelry demand accounted for more than 62% of global jewelry demand in Q1 2013. China and India are the two major markets for gold, and along with a growing middle class and cultural trends, a more positive economic outlook contributes to positive consumer sentiment in these markets, demonstrating how intimately gold and the economy are related.

Q: What makes gold continue to be a worthwhile investment?

A: Gold operates on the basic economic fundamentals of demand and supply. The World Gold Council’s view is that demand is strong while supply remains constrained, and that this dynamic ultimately drives the long-term price and demand for the metal. From an investment perspective, gold has a clear role to play as a strategic asset within a diversified portfolio that contains other riskier assets. Portfolios that contain even a small allocation of gold are proven to be generally more robust and better able to cope with market uncertainties than those that do not, showing improved stability of returns. In relation to currency, gold’s unique foreign exchange-hedging characteristics offer significant additional benefits in optimizing risk-adjusted returns during periods of extreme market stress and heightened currency tail-risk.

Q: What are currently the main priorities and challenges for the gold mining industry?

A: While the World Gold Council’s core mission is to develop markets by stimulating and sustaining demand and we have therefore traditionally been less focused on mine production issues, in recent years we have sought to understand how we might assist in and contribute to creating a more sustainable market on both the demand and the supply side. With regards to the main challenges facing gold miners, we note the recent findings published by PwC in their annual review of the general mining industry (Mine 2013: A Confidence Crisis), which highlighted the lack of confidence in the sector and suggested that to re-engage investors, mining companies must do a combination of the following: control costs and implement capital discipline; deliver on promises; improve returns; resist new projects or expensive acquisitions, even when prices rebound; and negotiate and manage resource nationalism. These challenges apply to the whole extractive sector, but are certainly highly relevant to gold miners, too.

Q: What impact do you expect the recent drop in gold prices to have on the gold mining industry in the short, medium and long term?

A: The rising gold price in the last decade has fueled an increase in expansion projects and exploration, but major new finds have proved highly elusive. Mining stocks are not immune to wider swings in the equities market, and can be affected by negative investor sentiment and fluctuations in the spot gold price. In the short term, this has been evident in the recent price corrections seen in the gold market in April and in June 2013. The current price environment has resulted in many mining companies focusing on cost reduction and core assets, with less enthusiasm for riskier projects. It has also led to some companies reassessing the levels at which ore grades are considered a viable resource. Quality, rather than quantity, has become a basic principle for many miners. In the current environment gold mining companies are seeking to secure future success by focusing on core expertise and quality resources, cutting costs, reporting in a consistent and transparent fashion, and engaging with stakeholders to better explain the beneficial impacts of their operations. Despite the short-term impact that this may have on the mining industry, the underlying positive case for gold remains robust. The long term fundamentals of the metal point to a growing gold market across all territories, and if this persists, as we believe it will, the industry should be able to reassert itself and continue to be both industrious and profitable in the long term.

Q: How are you working together with your members to introduce the ‘all-in sustaining cost’ and ‘all-in cost’ metrics to report production costs?

A: The World Gold Council has been working closely with its member companies to develop these non-GAAP measures, which are intended to provide further transparency into the costs associated with gold mining, while also improving investor understanding. The World Gold Council’s members requested help to develop the non-GAAP measure, and as a result we have been working closely with our members, under the supervision of the Council’s Board, to develop this new approach. It is expected that these new metrics, the ‘all-in sustaining cost’ and the ‘all-in cost’, will be helpful to investors, governments, local communities and other stakeholders in understanding the economics of gold mining. The ‘all-in sustaining cost’ is an extension of existing ‘cash cost’ metrics, and incorporates costs related to sustaining production. The ‘all-in cost’ includes additional costs that reflect the varying costs of producing gold over the life-cycle of a mine. It is up to individual companies to determine how they report to the market and to decide whether their stakeholders will find these new metrics of value useful in understanding their business; it is expected that, since many companies report on a calendar year basis, they may choose to use these metrics from January 1, 2014.

Q: How does the World Gold Council view the position of Mexico in the global gold mining industry?

A: Whilst we cannot claim to be experts in the local mining sector, the World Gold Council is certainly aware that gold production has increased dramatically in Mexico over the last decade, rising over 365%, from around 20 tonnes in 2003 to over 95 tonnes in 2012. It is now the ninth largest gold producing country in the world. This will undoubtedly mean that gold is increasingly significant to the development of the local economies in which mining occurs. The rapid development of large scale mining projects in locations that may not previously have experienced major industrial enterprise presents unique challenges that must be mindfully and effectively handled. However, if the impressive recent growth seen in gold mining in Mexico is coupled with ongoing efforts to drive stability and endurance in the sector from a global perspective, the outlook for the Mexican gold mining industry is extremely optimistic.

Q: What are your perspectives on the development of the gold industry in the coming five years, and what are your goals for helping the industry to reach its full potential?

A: The World Gold Council looks at the underlying fundamentals and market sentiment for gold, adopting a longer term view and a more considered approach. Despite recent variances in the price of gold, the World Gold Council believes that the long term outlook for gold remains positive.

We actively engage in joint activities to promote demand for gold in all its forms and are constantly reviewing opportunities that aim to stimulate and sustain demand for gold and create enduring value for its stakeholders.