Gold mining may not be profitable even near $1,000 per ounce

11:15p ET Friday, August 21, 2009

Dear Friend of GATA and Gold:

A friend, D.T.B., writes:

"I am confused regarding the average production cost of an ounce of gold. I have read a number of articles stating that the average production cost is at or near the current price, while other articles say the average production cost is about half the current price. Do you have any figures on the costs to produce gold exclusive of sales, marketing, administration, and so forth?"

There don't seem to be any official figures on this. It is largely a matter of informed opinion. The opinion of the people GATA most respects is that, if resource replacement costs are counted, the current price of gold does not allow for much profit on the whole for the gold mining industry.

One thing is pretty sure: For years now gold mining production has been falling substantially even as the gold price has been rising substantially and gold demand has been increasing. The gap between production and demand has been covered by central bank dishoarding and by the diversion of gold demand into more and more mere paper promises of the metal -- derivatives -- a growing system of what might be called fractional reserve gold banking.

This suggests that the gold price has not yet reached the point where it is encouraging production; that, on average, if replacement costs are counted, gold mining remains uneconomic even as the price nears $1,000 per ounce; and that a much higher price will be needed to match supply with demand, the more so as central banks reduce their dishoarding.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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