Metals Focus: Gold Mine Output to Slip 5 Percent in 2020

A decline in supply coupled with an increase in recycling will provide a “gentle tailwind” for the gold price this year, according to the Metals Focus 2020 Gold Report.

The yellow metal edged as high as US$1,777.60 per ounce on Wednesday (June 24), and the precious metals consultancy is forecasting that the bullish trend will continue.

“We are expecting really quite a strong rally from here on, seeing prices climb towards the end of the year getting close to the all-time high,” said Adam Webb, director of mine supply at the firm. “And that gives us an average for the year of around US$1,700, up 22 percent year-on-year.”

As optimistic as it sounds, the firm acknowledged that it is a more restrained forecast when compared to some of the more “dramatic” projections other analysts have released over the last few months.

“And a key reason for that is that we would not be surprised to see a period of stabilization or active corrections in the next couple of months,” Webb explained.

However, as 2020 has been a year of much uncertainty, many unknowns still remain — particularly when it comes to gold price motivators for the rest of the year.

A potential coronavirus vaccine or cure could create an outside reaction in markets, the analyst noted.

“Now, even if we are showing restraint there, we certainly entertain the notion that gold prices could continue to move higher beyond 2020, and that’s when some of those levels that others have mentioned might finally be reached,” said Webb.

Mine output expected to fall

Metals Focus is calling for a global gold supply decline of 1 percent for 2020, with output from the mining sector expected to decrease by 5 percent.

The greatest drops in production will be seen in South Africa, Peru and China, countries where mines were shut or where work was reduced in compliance with government lockdown orders.

Russia and Australia, which weren’t impacted by COVID-19 mine closures, will see a drop in output due to new mines reaching steady production rates; this will result in flatter production. Mature assets will also make reduced contributions.

Canada and Bulgaria are expected to provide increased output, stemming from the ramp up of projects.

The director of mine supply at Metals Focus pointed out that even for countries where the pandemic didn’t disrupt production, transportation and logistical issues were unavoidable.

“This year there is increased uncertainty in the forecast (compared to) previous years because the situation is still developing,” Webb said.

“The impact for most countries was felt in Q2, and obviously miners haven’t reported that information yet, and the possibility of future outbreaks (also) needs to be considered.”

Another consideration is the monetary and fiscal policies administered since the pandemic.

Metals Focus calls in its report for a 9 percent increase in physical gold investment as equity market weakness, rapidly rising sovereign debt and low- and negative-yielding bonds drive investors toward the yellow safe haven.

“The UK, for example, has the dubious honor of getting to 100 percent of GDP for its sovereign debt. We also cannot ignore consumer debt and corporate debt,” said Webb. “Some of this has some short-term implications for gold and investment.”

He went on to explain that the monetary and fiscal policy measures that have been enacted are raising the chances of inflation. In turn, that may be exacerbated by “(the) globalization and widening of supply chains, which may well increase costs of goods.”

All in all, the metals consultancy group remains cautious yet optimistic about gold’s ability to continue climbing higher. The price of gold was US$1,763.10 at 3:23 p.m. EDT on Thursday (June 25).

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.