Illustration of a goldsmith casting gold into ingot moulds

Gold Production Margins at Highest Levels in 40 Years

Gold Production Margins at Highest Levels in 40 Years

Pressure to Hedge Future Production Intensifies

Not so long ago, gold producers were looking for ways to cut costs in order to maintain operating margins at levels that could sustain production in the event of further declines in the price of gold. Some of us might recall that before gold made it through the key technical price level of $1350/$1375, numbers like $1000 per ounce or even $900 per ounce were in the conversation. 

Now, that seems like a very long time ago – only, it wasn’t. 

So what’s the “buzz” amongst the institutional investors who favor large-cap gold stocks? Operating margins. What was a worry and concern at the “bottom,” ironically evokes the same type of worry and concern at the “top” but for a different reason.

Institutional investors rely on analysts, and analysts rely on math. The math always gets a bit shaky when it is applied to something that is moving into uncharted territory – as gold is doing today.

The math that analysts so heavily rely upon works great when it is “in a box.” Meaning, there are clearly defined lower and upper limits. But what happens when the upper limit is breached? What then?

That’s when analysts become just like you and me. All they have is an opinion. And this is why they get a bit twitchy when asked to supply that opinion to their firms’ client base.  

That is why we are starting to see people once again talk about hedging production. Analysts correctly identify the previous “top” and compare it to the current one. Then, as in the case of gold, when the price moves higher, they start to remind the industry what would have been a winning strategy. 

Of course, we can’t fault analysts for coming to this simple conclusion. 

After all, “the market moves in cycles – up and down.” This is why it’s always a good idea to take something off-the-table near the “top” of the market.

While in many cases, this makes sense, but in gold’s case, it might not. 

The fact that producers are not responding for calls to increase their hedge books tells us something.  

CEOs of producing gold companies who are currently enjoying the highest operating margins in the past four decades see no reason to opt-out of potential future gains by even higher prices for gold. There seems to be a collective consensus that gold has not seen its new “top” for the current bull market, which appears to be trending higher.

Are these same CEOs gambling with their shareholders’ future?

One would like to think not. So how are they getting their collective courage to ignore the analysts and their math and stick to their convictions that the gold price has a long, long way to go before a true “top” is seen?

We have some thoughts on the matter. 

First, from a charting perspective, gold looks like it is just beginning the next leg up. Please see our most recent chart analysis to see where we think gold may be headed in the coming years: CLICK HERE

Perhaps gold company CEOs don’t like to play “make-believe”. Maybe the relatively recent “financial pain medicine” of writedowns coming on the heels of over-leveraged debt and some large, failed projects has brought them sobriety. 

They can use that sobriety to assess the larger picture of consumer/corporate/government debt that doesn’t seem to want to go away, let alone be dealt with in any way, by anybody. This is the world of “make-believe” that the gold CEOs do not accept.

After all, they had to deal with their own difficulties, why shouldn’t everyone else?

So there you have it. We are at the very beginning of what many industry executives believe will be a strong, sustained rally for gold that will last many years.

Their silence on hedging is speaking volumes.

-John Top

Disclosure: We own gold, gold production royalties, and gold stocks.

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