Gold output set for decline

The world’s top gold mining companies have warned that global production of the precious metal is likely to resume a long-term decline in coming years, in spite of a record-breaking surge in the price.

Much of gold’s recent rise to an all-time high of $1,122.85 last week has been due to the weaker dollar and huge inflows into ETFs, as investors have sought sanctuary from the financial crisis by buying physical assets.

Some people believe that there was ample scope for output to increase over the next year in response to rising prices and after years of stagnating production. That and any rally in the dollar could lead to a correction in the gold price.

Longer-term supply constraints, however, could underpin prices. Supply will not be a deciding factor, but on balance it should be a price support.

Global gold mine production will rise 3.7 per cent in 2009 to 2,502 tonnes, largely because of strong Indonesian production. But that is just an interruption to a downward trend, not a secular shift back to growth. Any increase in mine supply in the near term would be “artificial” – and due to marginal projects being restarted because of the high price.

That is especially true in South Africa, which until 2007 was the world’s leading producer and where the economics of bringing gold to the surface in some deep, ageing mines is being questioned. Costs are going up and grades are going down.