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Gold pricing and production costs

Demand for gold continues to grow, spurring miners to conduct operations to extract the yellow metal from the earth. But even as these ventures and related stocks remain risky, the one constant is a rising value in the final products, physical gold bars and coins.

Published: 22-03-2013 00:00

Gold pricing and production costs

Gold mining

When you buy a gold bar or coin from the BullionStar store, it’s hard to imagine that it had ever been in any other form besides the final product. In fact, there is a thorough and exhaustive, not to mention costly, mining and refining process.

Various miners have their estimates as to how much it costs to extract gold, and silver, per ounce. At present, this estimate runs in the hundreds of dollars per ounce of gold, which indeed sounds expensive. However, this is more than made up for by the high demand for the physical product, wherein gold is traded at a price well above costs.

When gold is separated from other minerals, through various methods of extraction, the flaky substance is delivered to refiners, wherein it is still not recognizable except to some extent by the color. There is then a further process of filtration, until the concentrated gold is melted together. In this liquid form is it molded, or cost, thus being made into bars and coins as well as jewelry.

Cost-price spread

With gold at its high price, miners are further incentivized to extract it, with the major limitation being a company’s capability to find sources for extraction. Production may in fact be poised to go down, even as a number of mining companies have managed to profit due to the spread between costs and the price of gold.

There is further incentive for miners due to the possibility of an increase in demand for gold as an investment, what with concerns of inflation and depreciation of currencies. Gold is seen as a substitute, or perhaps as the true basis, of the value of money. Increasing demand is indicated in the way central banks have been buying at 50-year record levels. This rise in central bank buying can be perceived as hedging by governments that are wary of each others’ inflationary practices.

As demand for gold increases, the spread between costs and prices will further increase, at least for a time. Eventually, as prices rise, so will demand for cost inputs. Costs may eventually rise and narrow the spread, but so far this has not happened.

Physical gold preferable, risk-free

While risk remains for individual mining companies, due to difficulties in finding new places to mine for gold, the final products, gold bars and coins, will continue to enjoy high demand. In this sense, it is preferable to invest and hold on to physical gold rather than mining stocks, which remain a hit-or-miss proposition, particularly with junior mining companies that may never earn a cent for all their endeavors and risk-taking.