Canada / Analyst Insights
The Effects of Rising Gold Prices on Canadian Mining Industries

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by Eva Koronios, Industry Research Analyst
Aug 24 2020

Due to the coronavirus pandemic, the Canadian mining sector is forecast to experience various setbacks. However, the Gold & Silver Ore Mining industry in Canada (IBISWorld report 21222CA) is projected to perform particularly well in 2020. To this end, industry revenue, 98.4% of which is derived from the industry’s gold mining activities, is anticipated to increase 4.5% over the year. Read on for IBISWorld’s analysis of the factors driving the industry’s positive performance despite the difficulties that have plagued mining operations more generally.

Rising gold prices

The world price of gold has risen consistently since 2016; in 2020 specifically, gold prices are projected to rise 19.7%. A similar trend occurred during the global financial crisis and recession of 2008 and 2009, in which gold prices increased 25.2% and 11.4%, respectively. In general, and during economic downturns, investment in gold rises sharply. This is because gold is seen as a less risky, more resilient asset compared with global currencies. Currency prices have been volatile over the past few months due to the economic disruption caused by the pandemic.

In addition to currency fluctuations, stock prices fluctuated during the beginning of the pandemic, though stock prices have been rising since March. Nevertheless, concerns over currency fluctuations remain, and many commodity prices other than gold are currently in the process of collapse. For instance, according to IBISWorld estimates, the world price of crude oil is forecast to fall 42.5% in 2020, and the world prices of zinc and aluminum are forecast to decrease 23.1% and 13.2% over the same year, respectively. Consequently, investors are once again hailing the safety of gold as an asset during troubling times. Lastly, the US election cycle has compounded this sense of coronavirus-driven global uncertainty, although these pressures are both expected to ease in 2021. To this end, the price of gold is forecast to increase only marginally next year, with gold prices projected to decline in the long run as the global economy recovers.

 

 

An increase in scarcity

Even though gold is now trading at record prices, the industry nevertheless continues to contend with operational difficulties. Namely, one of the biggest challenges facing industry operators is the fact that gold is becoming increasingly more difficult to mine. The rate of new gold mine discoveries has declined throughout the past several decades, with barely any “world class” deposits being found. “World class” gold deposits are high-grade and plentiful, and operators are concerned that a lack of these types of deposits regarding future gold production will adversely affect the industry’s structure.

Moreover, gold is naturally one of the rarest metals in the earth’s crust, and a significant portion of the easier-to-extract ore has already been mined. This holds true for Canada as well as other countries such as South Africa. While this is not something that industry operators must immediately contend with, this does mean that operators will increasingly have to branch out as the available “surface gold” continues to dry up, thus drilling for gold in more difficult (and potentially inhospitable) places. This may increase the industry’s operating costs in the long run and lead to new methods of gold mining out of necessity, such as mining the ocean floor for gold ore deposits. At present, however, many prominent industry operators have been able to increase their dividends and are optimistic about their short-term growth prospects, with the duration of this trend in a broader sense largely dependent on virus mitigation and macroeconomic recovery.