In 2013, we analyzed and posted the gold industry's true all-in costs for each mined ounce of gold. We have analyzed almost all of the major publicly traded gold producers, with a total production of over 25 million ounces (around 800 tonnes) of gold for 2012. According to the USGS, the world mined an estimated 2700 tonnes of gold in 2012, so the results of this analysis incorporates 30% of total 2012 gold production. Although we have our doubts about the accuracy of the USGS estimate, we believe our numbers represent a large enough portion of mined production to extrapolate as a general figure across the industry.
For gold equity investors, understanding these costs are important because it gives insight into how much the industry spends to produce each ounce of gold versus a specific company. This allows investors to compare a specific company to the industry as a whole and benchmark its performance.
For gold ETF investors (GLD, SGOL, GTU, and PHYS) this metric may be even more important because it allows an inside understanding of the true costs associated with producing each new ounce of gold. This is arguably the most important metric in analyzing any commodity because it shows the price where production of that commodity becomes uneconomic, which provides a very strong long-term floor for the price of the commodity. If it costs more to mine a commodity than the market is willing to pay for it, eventually producers will stop producing the commodity and close up shop. This does not mean that the price of gold cannot fall below the cost of production; it means that it would be unsustainable for it to stay there for long periods of time.
Some investors argue that above-ground stocks of gold are much greater than mined production and so any analysis of production costs is irrelevant. While it is true that above-ground stocks dwarf mined production, this argument stems from a lack of understanding about marginal supply in the gold industry.
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