Few precious metals have caught the attention of generations of buyers across eras. Indeed from the consumer point of view, gold has historically been used as both a medium of exchange and an investment vehicle. But from the supply standpoint, how does the “cost of production” stack up? What are some of the elements that impact gold’s price? How does it affect the final consumer and investors?
In the second episode of Golden Compass, Philip Newman, the Managing Director at Metal Focus joins Money Control to talk about “valuation of gold”.
“I think we have seen quite varying trends from that perspective. What we've seen more recently, of course, is with the rising inputs of energy costs, we have seen production costs rising more recently”, said Mr Newman. Higher gold prices allow companies to invest more “either in exploration or to perhaps mine areas that are less economic at lower gold prices. So they do tend to move in tandem to some extent.”
Geography governs gold prices
Moreover, the cost of gold production, too, varies geographically and there are multiple cost components. For instance, they include the cost of mining and the cost of maintaining a head office for a mining company. “According to our recent Gold Focus 2022, you do see some quite interesting variations. In North America it was just over $1,000, about $1068 per ounce. If you look at that in Africa, it was actually just a little bit higher. That reflects the deep nature of many of the mines there. So for Africa as a whole, it was about $1162. And again, in Asia, costs actually were a little bit lower, below $1,000, just over $900”, said Mr Newman.
The key factor that drives these costs are energy inputs as they account for a high share of mining costs. Taxes, too, contribute to the final cost. In Dubai, for example, an important market be it from consumption or as an entrepreneur, the sales tax, at 5%, is lower as compared to other economics. Small wonder that most Indians now buy gold in Dubai rather than in India.
On the other hand, people also choose to sell gold to fund their immediate needs or for seeking a loan in a country like India. “Well, I think the key point in India is just how successful and how liquid the loan market is, for example. Many consumers feel very comfortable in using that part of the market. We've certainly seen that when prices in rupee terms on dollar, whatever it may be, have risen”, said Mr Newman.
Exchange rate and gold are tied at the hip
Currency fluctuations also determine gold’s price, which is starkly different across say, American Dollar, Indian rupees or Japanese Yen. “The exchange rate plays an incredibly important role”, said Mr Newman. “If you look at the weakness in Euro and how gold has performed in Euro terms, you see that it actually held up remarkably well compared to gold in dollar terms”, he added. Closer home in India, as the rupee depreciated, it helped to cushion some of the losses.
It would still be “tough” to arrive at what the ideal and fair valuation of gold should be. A lot continues to depend on how the Federal Reserve, America’s central bank reacts with its interest rate announcements in light of rising inflation. No crystal ball has yet been invented that could correctly predict prices of gold. But knowing the key levers that can sway gold prices helps us with a better understanding of how the precious metal is valued.
Moneycontrol journalists were not involved in the creation of the article