Dorothy, Trade Those Ruby Slippers for Gold!

Follow the yellow brick road. Remarkably, this advice from a village of munchkins almost 70 years ago remains decidedly relevant for investors today. Thanks to a stunning series of admissions by gold industry executives, it is now apparent that a concrete floor paved with yellow bricks is currently under construction beneath gold at the $700 level.

Although the specter of inflation and lingering weakness in the U.S. dollar has already built a case for gold that's rock solid, emerging information about what it costs to mine the metal predicts a parallel, powerful upward catalyst for the price of gold.

This week, Barrick Gold (NYSE: ABX  ) CFO Jamie Sokalsky announced that the break-even price for gold projects industrywide currently falls within the $700-$800 per ounce range. Sokalsky's statements come on the heels of another recent assessment by Gold Fields (NYSE: GFI  ) CEO Nick Holland, who stated, "The all-in cost of production in a gold mine, including ongoing capital to keep it going, is probably around $700/oz."

The "all-in" cost metric they're referring to is the broadest measure of miners' investments in gold projects, including costs incurred through acquisition, exploration, development, production, maintenance, and depreciation. While the more widely followed cash cost of production per ounce is a key metric for tracking real-time profitability and cash flow, the all-in cost is crucial to the strategic decision-making process for mining executives.

The surprisingly slender margin between the current spot price around $875 and a cost basis of between $700 and $800 will have a negative impact on the economic feasibility of future projects. If gold prices remain at today's levels, in Sokalsky's words, the high costs will "make some new projects that the industry has difficult to bring in and that's going to be very bullish for the gold price."

As a snapshot, these comments by executives of two of the world's major gold producers make it clear that something has to give. Given that the established trend for mine operating costs is clearly higher, as recent evidence from Newmont Mining (NYSE: NEM  ) and Kinross Gold (NYSE: KGC  ) shows, this Fool is compelled to conclude once again that the road to the emerald city of profit is paved in yellow bricks of gold.

Further Foolishness:

Why stand alone in contemplating the complex array of issues facing investors today? More than 105,000 people turn to the Motley Fool CAPS community for mutual guidance and collective research. Better yet, it's free and fun! See you inside.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found acting foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Gold Fields and Kinross Gold. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (0) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 658875, ~/Articles/ArticleHandler.aspx, 9/2/2014 5:10:19 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement