DOING SOME DIGGING – The new Golden Age begins

The price of gold hit US$500/oz on Dec. 1, ushering in a new Golden Age. And the price seems to be headed for great...
The price of gold hit US$500/oz on Dec. 1, ushering in a new Golden Age. And the price seems to be headed for greater glory. At noon today (Wednesday), it was trading at US$515/oz on the New York market. The gold bugs are again singing their happy tune.

Analysts are giddy with the high gold price, and almost all of them believe it will continue to rise. Demand for the yellow metal is supported by its value as an investment vehicle. Analysts cite upwards price pressure due to the fear of worldwide inflation, which pushes up global interest rates. They point out that central banks have stopped selling off their gold reserves, a decision that supports higher prices. And in a world of geopolitical instability, gold is an easily transported commodity recognized anywhere as payment for good or services.

Generally speaking, the high gold price buoys the share prices of producers. As their shares increase in value, these companies are propelling the merger-go-round at dizzying speeds. Barrick wants Placer Dome. Goldcorp picks up Virginia Gold's Elonore project. IamGold is on the trail of Galley Gold. Gold Fields is swallowing Bolivar Gold. (And that is not even close to a comprehensive list, just the recent announcements.)

The upside to consolidation in the gold sector is that producers may reap economies of scale. Larger companies with many mines are able to operate at lower production costs per ounce, compared with small producers with only one or two properties. That puts larger producers in a position to benefit even more from high gold prices.

The gold exploration sector is spending money at a level not seen for many years. Almost every potentially gold-bearing boulder is being overturned. Old mines that haven't produced an ounce in 60 or even 80 years are getting fresh inspections. Formations that have never before yielded gold are being drilled because their geology is favourable, thanks to new interpretations. And many juniors will succeed in their quest, thanks to the strong metal price. Mining a profitable commodity is a better bet than producing something that nobody wants.

For those with little faith in the staying power of a high gold price, more companies are turning to hedging, contrary to what I wrote last week. For example, European Minerals of London, U.K., has hedged 443,000 oz of gold at US$574.25/oz as security for its eight-year, US$75.4-million debt facility. Glamis Gold, Goldcorp and a few other gold miners remain proudly unhedged.

In 1980 gold blossomed to an all-time high of US$850/oz, and then the price withered for the next 25 years. If the analysts are correct, there are many reasons to think it will continue to climb rather than fall over the next decade. And with it, the pace of exploration and consolidation will accelerate in this new Golden Age.


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