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Australian dollar gold price hits record high amid doubts over production future

The Australian-dollar gold price has hit a record high which is building optimism for the country's gold miners that analysts say are struggling to keep production levels from falling after 2020.

The Perth Mint confirmed to S&P Global Market Intelligence that the Australian-dollar gold price reached an all-time high of A$1,922.70 per ounce on June 7 while U.S. dollar gold price topped US$1,340 per ounce by the end of that week, up 2.7% over the prior week.

S&P Global Market Intelligence forecast earlier this month that Australia's gold production would start to fall after 2020 due to the depletion of numerous ageing mines like St Ives, Agnew/Lawlers, Southern Cross and Telfer, though that could be pushed out by one to two years given updated reserves recently released by Gold Fields Ltd. at St Ives and at Agnew/Lawlers.

Gold production from Australia, currently ranked second according to S&P Global Market Intelligence data, will fall by 12.8% by fiscal 2022, thus dropping to fourth place as Canada and Russia overtake it, as shown in the chart below.

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S&P Global Market Intelligence Metals & Mining Research Analyst Christopher Galbraith said in an interview that a significant share of measured and indicated and inferred resources is expected to be converted to mineable reserves given the significant investment that has been poured into brownfields exploration in Australia.

Even so, he believes the U.S. Geological Survey's assessment that Australia has 9,800 tonnes of reserves compared the U.S.' 3,000 tonnes is "optimistic," citing the USGS' own report stating Australia's JORC-compliant reserves are closer to 3,800 tonnes.

While even that is high, Galbraith said where that gold is situated matters, citing Cadia in New South Wales, the mine which holds Australia's largest reserve source but is an underground operation where it will take many years to deplete the known mineralization.

Meanwhile Olympic Dam, which is the next largest — and largest when resources are included — only produces around 100,000 ounces a year as the gold is low grade, and while it is currently projected to operate out to 2043, Galbraith said it will still only rise to about 180,000 ounces per annum.

Galbraith says another factor affecting the country's output of gold is that as mines start to close, new ones are failing to match output.

Supporting evidence

Financial services firm Hartleys' Resources Analyst John Macdonald told S&P Global Market Intelligence the scarcity of greenfields exploration and significant new discoveries in recent years means growth in gold production is unlikely to come from "mature" places like Australia, Canada or South Africa. He said exploration in Australia has not been reaching into new areas particularly strongly.

Macdonald believes the best chance for increasing gold production is from places which have previously struggled to attract capital, like West Africa, Latin America and some Asian countries, but therein lies the problem.

"West Africa has been going backwards in attraction for capital, which is not boding well for big expansion for gold production," Macdonald said.

Aside from Acacia Mining PLC's long-running issues in Tanzania, Macdonald said costs in West Africa, particularly Ghana, have "crept up" more than in Australia, which he said is at the bottom of the cost curve in terms of unit costs despite being a high wage-paying country for mining.

Yet amid all this, financial services firm Martin Place Securities Executive Chairman Barry Dawes said the Australian-dollar gold price continuing to rise bodes well for Australia's gold sector.

Dawes strongly disagrees with Galbraith's forecast that Australia's gold production will decline, as the history of Australia's gold sector has shown a major new discovery could significantly ramp up production numbers, as has been the case at Fosterville in Victoria. He cited the decade between 1980 and 1990 when gold production in Australia rose from 20 tonnes to about 200 tonnes.

Dawes believes the gold price is being affected not so much by the U.S. dollar or interest rates, but the fact that more people in China and India are buying gold, along with central banks, thus demand is "well in excess" of western countries' mined gold production.

On June 4, the Reserve Bank of Australia cut interest rates from 1.5% to a new record low of 1.25%, less than the rate of inflation.

Financial advisory Patersons Securities' director Don Inglis told the Resources Rising Stars conference in Queensland June 4 the Australian dollar gold price had risen year on year since 2015, and would go higher following the interest rate cut as it is getting harder to find gold.