As I peer through a gilded crystal ball, I clearly see elements of a perfect storm on the horizon. Sustained winds and an epic storm surge will change the landscape we know today, and in its wake historians will recount heroic struggles for survival and adaptation.

This perfect storm is bearing down on the precious metals markets, and Newmont Mining (NYSE:NEM) has just provided an early severe-weather alert.

The fundamental drivers of demand for gold and silver and the lack of substantial increases in global production are potentially ferocious storm cells by themselves, but the sharp increases in cash cost to produce each ounce of gold complete the forecast. Newmont revealed this week that cash costs at its Ahafo Mine in Ghana will rise from $396 per ounce in 2007 to a range of $485 to $520 in 2008.

Earlier this month, Kinross Gold (NYSE:KGC) revealed a 44% increase in the cost of sales per gold ounce from $328 to $472 in its first-quarter earnings release. With confirmation from Newmont, the inevitability of the $500 cost threshold striking through the industry is crystal clear.

Gold prices were below $500 as recently as 2005, so to have costs march toward that level in a three-year period wedges an additional floor of support below the gold bull. The costs could exert upward pressure on gold prices if mine projects that are now in the feasibility or development stages face delays or cancellations as a result.

There is a culture of caution surrounding metals price assumptions that pervades the mining industry and its financiers that may shield investors during periods of soft pricing. But this knife cuts both ways. In an environment of rising prices, these price assumptions lag far behind both the present reality and even the most conservative forecasts.

And feasibility studies are time-consuming and expensive. Investors in NovaGold (AMEX:NG) have already seen damage from the imminent storm: Its joint-venture partner Teck Cominco (NYSE:TCK) said increases for cost projections contributed to its decision to suspend production of the Galore Creek property.

Despite the meteoric rise in gold, long-term price assumptions in the $550-$650 range are still common as a basis for assessing project feasibility. As production costs surge dangerously close to those levels, though, projects will be shelved. That’s when the storm will build to full strength.

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