Gold retaining value
The price of gold on May 1st 2021 was $1,767/oz which then rose to $1,910 in just one month. However are these changes in price normal? Yes, in the short term the price of gold can rise or fall although in the long term gold has a reputation of being a timeless currency!
For example, according to National Bureau of Economic Research – 2,000 years ago a centurion (roughly equivalent to a captain) received 38.58 ounces of gold per year (equivalent to $46,296 per year @$1,200/oz) while currently a U.S. Army captain receives about 37.11 ounces of gold (equivalent to $44,532 per year @1,200/oz). This is a perfect example of gold holding its value.
What influences the price of gold?
Monetary policies, economic data and demand and supply work hand-in-hand to determine the price of gold and the sustained growth in the gold price is driven by these factors and other small factors like ETF’s.
For example, during the covid-19 pandemic the economic data showed higher unemployment, stagnant GDP and slowdown of the economy. This led to most of the world economies to change their monetary policies to reduce their interest rate to the bare minimum. The interest rate is an opportunity cost to gold for investors as investors will invest where they receive most interest. During a very low interest rate period, investor will buy gold and thus increasing the demand of gold and driving up the prices during the times of slowdowns or recessions.
In order to satisfy this demand, companies listed on AIM and London Stock Exchange like #ECR -ECR Minerals PLC and #POW – Power Metal Resources Ltd are undertaking gold mining projects in gold rich countries like Australia.
Power Metal Resources has a 49.9% in private company Red Rock Australasia Pty Ltd (RRAL). RRAL has a portfolio of five exciting gold projects in the heart of the prolific world-class high-grade Victoria Goldfields which have produced 80+Moz Au historically.
In Western Australia, notably the Paterson Province in the eastern Pilbara Region, Power Metal Resources has a conditional agreement to acquire a 75% strategic interest in (FDR Australia).
FDR Australia holds a portfolio of copper-gold focused exploration interests in the Paterson Province, which is considered highly prospective for gold-copper and base metal mineral systems and is currently of particular focus for resource companies with a significant level of exploration activity underway across the region. Companies such as Rio Tinto are developing the Winu gold project, set to come into production by 2024, while the valuation of Greatland Gold #GGP rocketed from around £25m to highs around £1.3bn following a spectacular gold discovery at its Havieron project. This is now being jointly developed with Newcrest Mining.
ECR Minerals’ Bailieston and Creswick projects are the epicentre of the current gold exploration boom in Victoria.
Bailieston is located approximately 150km north of the Victorian state capital Melbourne, with good road access which hosts successful modern gold mines including the world-class Fosterville gold mine owned by Kirkland Lake Gold.
After announcing the initial results from its first drilling campaign at Bailieston, ECR has continued drilling and exploring across the territory, and has most recently announced the acquisition of a 297 acre land package near to the Cherry Tree project on the Bailieston license area. Here the company plans to develop a mine decline, processing plant and tailings dam
The Creswick project is considered highly prospective for gold mineralisation, hosting the Dimocks Main Shale geological feature, which extends over a 15km trend from the mining centre of Ballarat to the south, through ECR’s exploration licenses and applications.
A raft of drilling and data from the campaign has supplied ECR’s geological team with a much deeper understanding of the prospectivity of the trend across the license areas, and a few weeks back the board to the decision to acquire property at Brewing Lane, Springmount to further advance drilling programmes and to eventually develop a mine decline.
These two companies are among many other’s operating, exploring and discovering new mineral resources in Australia’s exceptionally fertile territories.
How does supply affect gold prices?
Such aggressive drilling programmes and significant level of exploration activity are planned in order to cater the high demand for gold. The higher supply now shifts the supply curve outward hence reaching a new equilibrium. This is shown below:
The outward shift of both, demand from D1 to D2 and supply side for S1 to S2 has resulted in a new increased price equilibrium from P1 to P2.
This increase in price of gold is a win-win for the supplier, stakeholders of the suppliers and the consumers. As the increase in demand is being satisfied by the increase in supply by the suppliers. While for the suppliers, they are receiving a higher price of the commodity for a larger amount sold.
This is what is known as ‘economic welfare’.
All in all, gold is an investment for the long term and factors like monetary policies, economic conditions and demand and supply play a major role to determine the prices. Gold might be a volatile commodity in the short term but it is by far the safest bet over the medium and long term.
And for investors preferring to mitigate risk from direct exposure to the yellow metal, owning shares in gold exploration and production companies can result in less direct volatility, but can potentially deliver much more upside if a gold discovery such as Greatland Gold’s Havieron project is made.