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Low gold price continues to dent Guyana’s economy

Guyana’s declared gold production and exports have each slumped by more than 20 percent, due to the fall in the international price for the yellow metal during the year, according to the Guyana Gold Board.

Finance Minister, Dr. Ashni Singh during his half-year report has already revised downward the country’s economic growth for this year from 5.6 percent to 4.6 percent largely due to a decline in the gold price.

Except for March 14, 2014 when the price of gold on the London Fix was at its highest for this year at US$1,385 per ounce; the price was generally low. It ended at US$1,195.50 at the close of trading on Friday, December 19, 2014.

That’s unlike January to May, 201 when the price averaged between US$1,680 and US$1,410 until it started to dip steadily throughout the remainder of that year to date.

The Gold Board said that the combined statistics of all mining operations and gold dealers’ data for 2014 have indicated that the expected levels of gold output for 2014 will not be met as was originally set at the beginning of the year. The major factor for these lower levels of declarations are as a result of the fall in the global price for the yellow metal on the world economy during this year.

Following is the remainder of the Gold Board’s statement:

Total declaration as at December 20, 2014 has decreased by 22.61% when compared to 2013, whilst gold purchased by the Guyana Gold Board (GGB) has fallen by 41.24% for the comparative periods. Dealers’ quantity of gold exported has increased by 10.16%, whilst the GGB quantity of gold exported has fallen by 40.26%. Thus, the overall quantity of gold exported for the two periods being compared are down by 22.73%. Moreover, the value of gold exported by dealers have increased by 10.86%, whilst the revenue garnered by the GGB has decreased by 43.48% during the comparative periods. The total revenue for the two comparative time periods have fallen by 23.45%.

In 2013 it was forecasted that gold might fall to $1,050 an ounce before this downturn is over. The yellow metal duly fell by a quarter in 2013, when compared to its highest level in 2011 and has made little headway in 2014, despite lots of geopolitical uncertainty. It stood at $1,198 an ounce on Friday evening. The sentiment is bearish and miners are being forced to curtail production or shelve investment plans.

Gold stocks have suffered a miserable few years, becoming a laughingstock even among contrarians.  However, this despised sector’s seemingly-endless downward spiral has left gold stocks vastly undervalued relative to gold, which drives their profits.  The fundamentally-absurd disconnect between gold-stock price levels and gold can’t last.  And it sure looks ready to end, making 2015 the year gold stocks shine again.

In the gold-mining industry, the price of gold is the dominant driver of corporate profits by far.  Mining costs are largely determined by the particular deposit being mined, and are largely fixed when any mine is designed and constructed.  So gold miners’ profits are almost totally dependent on the price of gold.  The higher it happens to be, the larger their margins grow since their costs generally don’t change much.

This dynamic is what has long made gold stocks attractive to investors.  When the gold price rallies, the profits of gold miners rocket higher much faster.  If a miner can produce gold for $900 an ounce, and sell it for $1200, its profits are $300.  But, if gold merely climbs 25% higher to $1500, that same miner’s profits double to $600.  This inherent profits leverage to gold makes the gold stocks really amplify gold’s moves.

Nonetheless, as in all stock-market sectors, this key fundamental relationship between earnings and stock prices can be temporarily derailed by sentiment extremes.  Sometimes investors get greedy, and bid gold-stock prices up far higher than their gold-driven profits could ever support.  And other times they get scared, selling so aggressively that prices fall far below their earnings-supported levels.  Great fear has plagued gold stocks.

Hence, it must be emphasized that the Ministry of Natural Resources and the Environment along with its supervisory and regulatory authorities; Guyana Geology and Mines Commission and Guyana Gold Board is continuously working with all stakeholders of the gold mining industry, in particular the Guyana Gold and Diamond Miners Association, to ensure the sustainability of the sector. Specifically, some of the interventions of the Government and its agencies are as follows:

       i.            Duty Free Concessions for All Terrain Vehicles (ATV), Excavators, Bulldozers and other machinery, Double-Cab Pickups, Spares and Equipment

      ii.            Fuel Licence

     iii.            Mercury Free Mining Development Fund

    iv.            Access to Foreign Currency (USD)

      v.            Hinterland Infrastructure

    vi.            Availability of New Areas for Mining

  vii.            Reduction in Royalty and Property Rental Rates

viii.            Work Permits

    ix.            Hinterland Security

      x.            Firearm Licences

    xi.            Human Resources development through the Guyana Mining School and Training Centre Inc.

Moreover, the year-on-year decline may suggest a weak market, but such comparisons are still heavily influenced by the events of last year. Longer term analysis shows a market in good health. Year-to-date volumes continue to extend the broad uptrend from the low seen in 2009. The quarterly volatility in the US dollar gold price was among the lowest levels seen over the past two decades, both a cause and effect of the benign demand environment. The lack of a clear price signal, as well as continuing to digest last year’s demand surge, caused investors to hold back from buying gold. The ongoing economic and geopolitical instability encouraged central banks to continue to seek the protection and diversification of gold.  Thus, the broad themes surrounding gold supply during the first half of the year continued to play out in second half.