Gold can hold value in all stages of its life. From the beginning of the mining process to being recycled again and again, gold holds value. Gold is a precious metal that is unlike any other. It can hold electric conductivity and can resist corrosion unlike any other precious metal. Therefore, gold holds value like no other precious metal.
Gold can hold value in all stages of its life. When we look at the beginning of gold’s life cycle, at the mining process we’ll find that gold creates mining jobs in local communities throughout Canada and the USA. In 2020, gold was Canada’s most valuable mined metal, with a value of 12.3 billion dollars. In 2022, 182 tonnes of gold were produced in Canadian mines which put Canada as the fifth largest global producer of gold.
This article is going to detail how gold is able to create value at different stages, including the value that gold creates for shareholders.
We know that gold is a popular metal due to its qualities that are unlike any other metal, but once it is mined, what is the gold being used for?
Before 2020, jewelry was the primary use for gold. From the mine, gold would be turned into beautiful watches, necklaces, rings, and other pieces of jewelry. But as of 2020, the demand of gold related to investments increased to 47% of the demand. This demand quickly overtook jewelry as the primary use of gold, which stands around 38% of gold use as of 2020.
The increase of gold in relation to investment can be traced back to the fear and uncertainty experienced as a result of the covid-19 pandemic. During these uncertain times, investors were turning to gold investments because it is believed that gold investment can be used as protection to the risks of inflation as well as market volatility.
Over the past decade, gold prices have fluctuated. In January 2011, one troy ounce of gold cost US$1360, it has increased to US$1756 per troy ounce as of 2020. However, the increase has not been a steady one.
Starting from October 2012, gold prices started to decline. This decline lasted a couple of years before gold prices started to recover in September 2018.
From 2018, gold prices have increased, and in 2020 reached record levels at US$2,000 per ounce due to investors using gold as a safe-haven during the pandemic. Since 2020, gold prices have come down but have continued to remain at high levels.
Before we get any further into the trends that are currently happening in the gold industry, we need to dive into the historical trends of the industry. A history is crucial in understanding the complexities of the gold industry.
When looking at the performance of the gold industry in the past decade, there may be some confusion due to the highs and lows the gold market experienced.
Despite strong periods of performance - such as Gold's boom in 2010–12; or companies' performance increasing after 2015 - total return to shareholders (TRS) at an aggregate level remained –2 percent over the past five years. Despite lagging behind the global equity markets, this was still in-line with the mining sector. Over the same period, the S&P Global 1200 created 7% on returns. This increase can be explained by the companies’ performances.
Overall, the demand for gold post 2011 has stayed relatively the same. It has ranged from 4,200 metric tons to 4,600 metric tons. The decline in gold prices that has occurred since 2012 has only furthered the pressure the gold industry had been feeling.
Additionally, several operating-expenditure and capital-expenditure inefficiencies were driven by inflation; gold companies focused on reducing their all-in sustaining costs and capital expenditures from 2012 to 2016, which fell by approximately 25 percent.
Since 2019, the gold industry’s performance has improved though investors were unable to reach profitability lines similar to levels in 2010-2012.
The performance of gold has continued to accelerate and the price of gold has increased slightly since early 2020.
The combination of economic uncertainty, low interest rates, and quantitative easing have resulted in investors seeking assets that are considered to be ‘safe-havens’.
Gold holdings have reached a historically high level, with gold ETFs being the second largest holders of gold in the USA, behind the USA government reserves. This increase has offset the declining demand of gold in other users. Jewelry, for example, had a decrease in demand during 2020 due to the pandemic postponing any sort of celebratory events.
Along with strengthened gold prices, the gold industry was performed well on economic KPI (economic key performance indicators).
How does this history relate to shareholders and the value that gold can continue to provide?
Due to COVID-19, the amount of gold that mines are able to produce is expected to be reduced by around 3-7% as gold companies comply with local lockdown protocols in order to keep their workers safe.
As a result, gold companies are predicted to increase prices to an all-time-high level. In an analysis of 85 gold companies, they were expected to generate close to 38 billion dollars in 2020, and 50 billion dollars in 2021. For comparison, in 2019 these same companies generated 25 billion dollars.
This free cash flow will leave a significant amount of cash balances at the company's disposal, which will eventually find its way to shareholders. In 2020, most companies significantly increased payouts for the year.
Over the past decade, the gold industry has struggled to create value for shareholders. However, things are beginning to turn around in recent years, and there is continuous value created for shareholders
Due to the high gold prices in 2020, the gold industry reached profit levels that hadn’t been seen in years which caught the attention of many financial investors. These strong prices have given gold companies strong performances that are expected to create cash flows.
Out of all the mining sectors, gold industry remains one of the most fragmented. Only 20% of the world’s total gold comes from the top five gold producers. This is due to the gold sector having lower barriers for entry into the industry.
Companies have been able to sustain themselves, even at a smaller scale. In the past. M&A deals have provided access to operational capabilities as well as easier access to funds.
For example, when Christian Milau, CEO of Equinox Gold completed and M&A deal with Premier gold mines, their strong balance sheet and operating cash flow was combined with a development-ready project that created value for shareholders in both companies.
The increase in cash availability and overall attractiveness is likely to spur M&A activity.
Gold continues to create value from the beginning stage of mining, to shareholders in mining companies. Investing in gold is a common way to diversify your portfolio and is seen as a safe haven for many investors.
As M&A activity continues to grow within gold companies, there will be more free cash flow within gold companies which will make its way to the shareholders, creating continuous value.