Global gold industry sees signs of post-crash revival

20 June 2019 3 min. read

Having seen the precious metal over-invested during the boom years leading to 2007, the gold industry has seen a decade of spending cuts and low returns. Now, though, new analysis shows that while investors remain cautious, long-term shortages could see a boost to the gold sector.

Amid the mounting threats of trade wars, economic slow-downs, and rapidly shifting geo-political arrangements, commodity prices have behaved erratically in recent months. Despite this, gold continues to be an investment haven, offering a solid and long-lasting commodity that can be held in one’s hand.

The industry has for centuries seen up and downs, with moments of near-madness giving way to periods of low value. Yet the material, which backed kings and currencies, has not fallen out of favour – offering a safe haven during crisis periods.

Gold prices peaks in recent decades

Following the financial crisis in 2008, gold boomed to close to $1,700 per ounce – a recent record. However, rapid expansion of the industry during the boom period, quickly gave way to difficulties as the price of gold declined, resulting in heavy cost-cutting and restructuring. New analysis from McKinsey & Company looks at how the industry has fared over the past decade through its boom-and-bust phase.

The most recent peak was in line with the oil crisis in the 1980s, when gold sold at $1,700 per ounce. However, the subsequent drop off was considerably less, as the Chinese equality crash and Brexit saw gold stabilise at around $1,200 per ounce. The most recent peak began with the end of the dot-com bubble in the early 2000s.

The boom years that followed the bubble saw large-scale investment from gold company management teams. The acquisition stint was aggressive, while many of the capital projects rolled out in the period were poorly managed. Acquisitions totalled more than 1,000 deals valued at $120 billion between 2000 and 2010, compared to $27 billion between 1990 and 2000.

Large gold company accumulative losses

Deal activity was in part being managed from a "not-a-bubble" mentality, with some industry experts believing the price would continue to climb to $5000 per ounce. This drove deal-making activity, with sometimes premiums of 30% paid. Meanwhile capital expenditure increased by 10 times, with aggregate spending at $125 billion.

However, the high gold value did not materialise, with prices falling in the early 2010s. This created a mini-crisis in the industry and affected firms began to write down deals that were now way out of kilter with the market – totalling $126 billion. Meanwhile, the total return on capital between 2010 and 2016 fell to 2.6%, well below the cost of capital – punishing shareholders. In total the industry lost $129 billion in value between the end of the paper gold rush in 2011 and 2018.

Large finds increasingly scarce

Gold mining companies have been relatively hard hit by the miscalculations at the start of the decade, with investors continuing to punish the industry. However, while the industry has stabilised, various key areas of uncertainty remain. Large green-field gold finds are becoming increasingly less common, with brownfield projects largely the main driver for mining growth.

Increased mining of current grounds has also continued. The lack of new finds may reflect wider difficulty as easy-to-reach gold is becoming less common. This could herald a demand for second-hand gold production, recycling, as well as increased demand pressure as supply begins to be constrained.