A simple question was posed by an astute audience member to a mining company representative at a recent public information session. “What good is gold anyway?” It’s a good question — especially in the face of fluctuating gold prices that can seem mysterious to the average person.
The World Gold Council provided a detailed answer to that question in a 2013 report authored by Price Waterhouse Coopers LLP, called The Direct Economic Impact of Gold. The foreword tells us that this is a time of change for the gold industry but stresses the importance of gold in the global economy.
The report takes a broad approach to the concept of gold in general and looks at the entire “value chain,” which includes not just gold mining, but refining, fabrication and consumption.
The key findings of the report provide some fascinating numbers. In 2012, the global gold supply reached 4,777 tonnes, with approximately two-thirds coming from mining and one-third from recycled gold.
And how that gold was used might be surprising to some people: 35 per cent was used in investment demand which is described as bar and coin and gold backed exchange; Central Bank gold purchases accounted for 12 per cent; 10 per cent was used in technology and manufacturing and interestingly, 43 per cent was used to produce jewelry.
As Chuck Jeannes, Goldcorp Inc. CEO, explained at the 2015 Mineral Exploration Roundup in Vancouver, gold is both a commodity and a currency. While gold is a global commodity, it has special significance in Northwestern Ontario which produces one-fifth of Canada’s gold.
John Mason, project manager for CEDC Mining services, observes that four new gold mines are scheduled to open in our region by 2020, contributing to the 900,000 ounces a year of gold that are produced annually in Northwestern Ontario. And that number is going to grow.
“We are a gold jurisdiction,” he says.
And although we are affected by many of the same global challenges that the World Gold Council outlines, Camillo Lento, professor of business administration at Lakehead University, points out that our region is spared some of the political and infrastructure challenges that have afflicted suppliers in areas like South America and Africa. And while the see-saw price of gold is a challenge for all suppliers, Lento points out a unique Canadian perspective.
“Gold is priced in U.S. dollars” he notes. “So as the Canadian dollar drops, all else being equal, the price of gold in Canadian dollars goes up for us.”
Understanding how the price of gold is determined could take hours of study but Lento’s considerable knowledge of and interest in this most prized of elements, helps to shed some light.
First of all, it is important to appreciate that the value and allure of gold seems to be imbedded deep within our human psyche and history. And although its value has a lot to do with supply and demand, it also has something to do with psychology.
To help us understand this, there are numerous books written about the history of gold. Author Kathryn Morse, in her book, The Nature of Gold: An Environmental History of the Klondike Gold Rush, examines what would drive otherwise reasonable men to risk life and limb in the North American gold rushes.
“Gold’s value and allure worked on the nature of the human body and the human soul, beyond the realm of reason, history and culture” she says.
Gold fever, as it came to be known, likely had less to do with the beauty, strength, malleability and resistance to oxidation of the famed metal than the fact that if you had it, you would be rich. And the scarcer it is, the more valuable it is and the richer you would become.
Lento provides further insight into this concept.
“Gold is incredibly scarce,” he says. And to illustrate just how scarce it is, he shares a quote from Warren Buffet who talks about the total amount of gold that has been pulled from the ground since the dawn of civilization. Most people would be surprised to learn that it could all fit into a cube with sides of just 20 metres.
He points out that besides supply and demand, the value (and price) of gold is impacted by the cost relative to the price. In other words, the value of gold is measured after deducting the costs of extracting it from the ground.
In Northwestern Ontario, the “all-in sustaining costs” — which is the cost of production, exploration and development — are less than $1,000 per ounce at Goldcorp’s Musselwhite and Red Lake mines and Barrick Gold-Hemlo.
There is no simple formula for understanding the value of gold but psychology also comes into play during especially difficult economic times. Because gold is seen as a currency and store of wealth, people will buy gold in times of hyper inflation when they are driven by fear.
“When people lose faith in the dollar, the economy and their paper money, they tend to buy gold,” Lento says.
Gold as a commodity and a currency is complex, but because it has retained its enduring allure and power throughout the ages, it will likely always be a significant factor in the global economy.
And because we live in a gold jurisdiction, it is helpful to understand a little bit about the iconic metal so we can answer the question, “what good is gold anyway?”
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