How $2,250 Gold Comes Into Clearer Viewhttp://www.fool.com/investing/general/2012/02/18/how-2250-gold-comes-into-clearer-view.aspx Christopher Barker
February 18, 2012
Although gold knocked on the door briefly during 2011, I am waiting until my long-standing price target of $2,000 per ounce is finally breached before I revise my conservative long-term price objective. In the meantime, my uninterrupted gaze across the gold market's fundamental landscape sees a steady trend toward de-risking of the $2,250 mark as a very conservative basis for a follow-on target.
I have discussed on countless occasions the key macroeconomic trends supporting sustained appreciation in the gold price, and I am well aware of just how contentious a topic it can be. But the fact is that investment demand for gold continues to expand, particularly in the East, where China is poised to surpass India as the world's foremost source of gold demand. Global mine supply, meanwhile, is struggling to keep up in an atmosphere of rising production costs, escalating mine-construction costs, and diminishing frequency and scale of new world-class discoveries.
Although the gold-price outlook can never be divorced from prevailing macroeconomic trends, I spot $2,250 gold coming into clearer view through a comprehensive examination of mining-industry fundamentals. The world's largest gold miner -- Barrick Gold (NYSE: ABX ) -- released its quarterly and annual results this week. Although I am not a shareholder, I continue to track Barrick very carefully as an effective harbinger of emerging industry dynamics. Barrick delivered another solid year in 2011, growing adjusted net earnings by 33% despite essentially flat production volume year over year. And by replacing the year's production of 7.7 million gold ounces to stand with nearly 140 million ounces of gold in reserves, the company reminds observers that meaningful volumes of gold can still be found ... but at what cost? For those interested on forecasting the gold price trend, that is the question to ask.
Observable cost inflation
At the same time, capital costs for mine construction are going through the roof. The conceived price tag for construction of NovaGold Resources' Galore Creek joint venture with Teck Resources (NYSE: TCK ) has increased by 373% since 2006 to reach a whopping $5.2 billion. The estimated cost to construct Barrick's 75%-owned Cerro Casale project in Chile has tripled since 2007 from $2 billion to $6 billion. Kinross Gold recently opted to reassess its entire growth pipeline in response to severe rates of cost inflation. In my recent interview, Thompson Creek Metals (NYSE: TC ) CEO Kevin Loughrey lamented, "We are living in a world where mining projects are expensive to build and getting more expensive."
The rising long-term floor beneath gold prices
Taking into account the substantial trailing cost inflation, would you believe that the industrywide all-in cost of gold production today is already trending closer to $1,200 per ounce? In a recent interview with Mineweb's Geoff Candy, AngloGold Ashanti (NYSE: AU