Analysis of the Global Gold Industry
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Published: Mon, 5 Dec 2016
Man since ancient times has lust for the gold. In the past it has been used as both for decorative purpose as jewellery and for actual currency. Now in modern times although the gold is not considered as currency in any part of the world, its popularity has remains the same because of its still continued use in jewellery business and also new status it has received as most popular investing commodity (Investopedia, n.d.).
In this research Global gold industry would be analyzed by first of all providing a brief description of the industry and also identifying who are the key players in the production of gold. Then the Porter’s 5-forces framework will be utilized to perform an industry analysis. Furthermore PESTLE Analysis will be done to determine what external macro-environmental factors affect the industry.
Also Industry “life-cycle” model will be applied to understand the stages through which gold firms progress. Finally using the previous research 3 possible future scenarios for the industry would be proposed and the most probable scenario would be identified.
Brief Description of the Gold Industry
Gold Mining industry involves mining and processing gold from the ground and then selling it in the world market. Gold is one of the most popular commodities, since last century world production of gold has increased more than 5 times.
Figure 1: Gold Production Timeline
The demand of gold is always higher than the world’s production capacity. Even though the production has remained almost same but the global market value has more than doubled in last 5 years.
Figure 2: Global Market Value & Volume
Currently America and Asia-Pacific are world’s largest global market and generates more than half of the global market revenue.
Figure 3: Market Segmentation
Also the Industry is highly fragmented, with top 4 companies Barrick Gold, Newmont Mining, AngloGold Ashanti and Gold Fields amounting less than 30% of total market share. Rest all share is taken by numerous small mining companies.
Figure 4: Prominent Players
1.1 Key Players present in Gold Industry.
Barrick Gold is the world’s largest pure gold mining company headquartered at Toronto, Canada. It operates 26 mines present in all 5 major continents. Barrick Gold is the industry leader with 2009 annual production 0f 7.4 million ounces (Moz). It also has the largest gold reserves of about 139.8 Moz (Barrick Gold, 2010).
Newmont Mining Corporation:
Newmont Mining based in Colorado, USA is also one the world’s largest gold producing company with major mines in 8 countries United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. It employs more than 33,000 employees. Its 2009 gold production was 5.3 Moz and has the gold reserve of 91.8 Moz (Newmont Mining, 2010).
AngloGold Ashanti is a South African mining company with over 21 mines in 4 continents. Majority of their mines lie in African and South American continent. In 2009, the company’s gold production was 4.6 Moz and has the reserves of 71.4 Moz (AngloGold Ashanti, 2010).
Gold Fields, another South African gold mining corporation is one of the world’s largest unhedged producers of the gold. Its primary operations are in the continent of South Africa and Australia. For 2009 it produced 3.6 Moz and current reserves stands at 81 Moz (Gold Fields, 2010).
Porter’s Five Forces Analysis.
Figure 5: Porter’s Five Forces
Porter’s five forces is a framework that explains five forces that influences an industry. These different sources shapes up the competition present in the industry. (Porter, 1979).
These five forces in context of Gold Industry are:
Threat of New Entrants: The main barrier to entry is financing. All precious metal industry including the most prominent metal gold is highly capital intensive. Even before the gold mine starts its first production, major investment is required for exploration, mine construction, heavy mining equipment etc. Therefore the threat of new entrants is relatively low.
Power of Suppliers: The primary resource a gold mine needs is land which is available in large amount in the world. So the only supply problem remains is the government’s permit to mine the land. Issues like environmental risks posses difficult challenges in securing government’s approval.
Power of Buyer: Buyer’s power is high in the gold industry as the gold is a commodity based product. Therefore gold mined by one company is not very different from the gold mined by another. Hence buyers will always favour companies that provide lower prices or favourable contract terms.
Availability of Substitute: Currently the threat from substitutes is relatively low. Substitutes for gold include other precious metals like silver, platinum, diamonds etc. Although their acceptance level is lower than gold. Gold currently holds the advantage of world currency as all over world it is used as investment. But as other precious metals like diamond gain popularity they may become more threatening substitutes.
Competition Rivalry: The four Industry structures that were mentioned ultimately drives competition and profitability not the evolution of the industry in terms of being it high tech or low tech, emerging or mature, regulated or unregulated (Porter, 2008).
Gold companies do not compete on price as market forces determine the price. But the main competition between them is for land. The long term survival of a precious metal company depends upon its reserves amount. And the only way to expand reserves is to continuously explore for economic feasible mining areas. Therefore gold companies invest heavily in exploration as the first one to discover is given first preference to mine by the governments.
PESTLE Analysis of Gold Industry
PEST or its extended form PESTLE analysis is examination of the external macro environment in which an industry functions. These factors are generally beyond the control or direct influence by a business in the industry. But they have significant impact on any business running in the industry (RapidBI, n.d.).
Figure 6: PESTLE
Government of a country has huge impact in the gold industry. Unlike other industries government imposes royalty just to mine the gold. And the rate of this royalty affects greatly the competitiveness of the industry especially the bottom-line of numerous small-scale miners (Kerr, 2010). Also many policies of the government always try to control both supply and price of the gold by hoarding or dishoarding the gold. First of all, government pursues the policy of hoarding gold in order to encourage miners to mine new gold (Montana River Action, n.d.). And when the demand for gold pushes the prices, the government dishoards it to keep the price down (Goldprice.org, 2005).
The state of the economy of the world has even greater impact on the gold prices than any policies by government. In fact economic condition can easily override any control by government to keep the gold price in check. Gold prices have inverse relation with the economy (Cunha, 1999). When the economy is in good conditions investors put their money on stocks and bonds. And when stock market falls due to bad economy, panicked investors sell their stocks and invest heavily in gold thereby causing price rise (Amadeo, 2009). Almost every recession period had affected positively on gold price.
Figure 7: Recession’s affect on Gold Price
Social factors can be said as main driving factor for the popularity of the gold, as the jewellery comprises the most major share in human consumption of the gold.
Figure 8: Global Gold Consumption
Since jewellery holds this large share in gold consumption hence any demand change in the directly affects the price of the gold. And jewellery demand depends upon many social factors like season, special occasions and cultural values. Special occasions like Weddings, Valentine’s Day, Religious festivals etc. causes high increase in demand. Also cultural values plays very important role in the world. Traditionally Asian culture like Indian, Middle-East and Chinese are always biggest buyer of the jewellery (World Gold Council, n.d.).
Gold apart from being only popular for social purposes is also one of the most sought after material for technological purposes. It is most malleable, ductile and highly bacteria resistant material known to man (Azomaterials, 2001). Gold has very high uses in wide range of industries from Bio-Medical, Catalysis, Dental, Environmental, Fuel Cells, Electronics, Nanotechnology, Photography, Space etc. Every year new industrial uses are discovered which in future can shift the consumption of gold more towards industry than social purposes.
Figure 9: Medical Uses of Gold
Before mining for gold, compliance with local governmental laws are necessary in which a prospector wishes to mine. For example in U.S. all mining including gold is controlled under General Mining Act of 1872. This act broadly states that any person is US above 18 years of age can stake a mining claim in any federal property (Goldplacer.com, n.d.).
Environment and gold mining does not go well with each other. Gold mining is very toxic waste producing industry. It is responsible for more than 96% of Arsenic and 78% of Lead toxic pollution in US alone. (Grinning Planet, 2005).
Figure 10: Gold Mining Pollution
Environmental phenomenons like earthquake also pose high danger to mining industry. According to geoscientists deep gold mines are most seismically active regions of the world and can cause cave-ins (Richardson, 2004). Recent 5.2 magnitude earthquake caused an Australian gold mine to shut down and lose millions of dollar in revenue (Valentine, 2010).
Product Life Cycle of Gold Industry
A new product introduced in market goes through series of stages which collectively known as Product Life Cycle. These stages are Introduction, Growth, Maturity and Decline. The underlying basis for these stages is the customer’s knowledge of the product. A newly introduced product is relatively unknown but as the customer became aware of it sales grow. Finally due to changes in customer tastes sales decline and the product is phased out (Day, 1981).
Figure 11: Product Life Cycle
Gold industry is different than other industries because gold is not a product, it is a commodity. That is, there is always demand for gold and gold from one producer is not different from another (World Gold Council, n.d.). Therefore Life Cycle in case of gold is not relevant to the product; its relevancy lies with the company which is producing gold. The following cycle explains how a gold mining company progresses through various stages in its life (Holmes, 2009).
Figure 12: Gold Firm’s Life Cycle
Introduction or Exploration Phase:
In this phase, the company first discovers the gold deposits and the stock price of the company rises sharply as investor’s runs to buy share. After that people realize that there are many barriers before first gold is produced and also will take years for the first gold to be produced. This causes big correction in company’s stock which can plummet up to 70%.
Growth or Development Phase:
In this phase instead of rising sales like in traditional PLC, the company’s stock actually declines till it reach a stable stage and then remains there while company performs feasibility study and development of mine over the years.
Maturity or Production Phase:
In this stage company is very close to mining its very first gold, different investors then come causes the price to rise again sharply. Eventually the share price stabilizes and the mine remains operational for many years.
Decline or Closing Phase:
After many years of mining, the gold mine’s production starts declining where the quantity of gold mined per year falls below the profitable margin for the company. Then the company either partially or completely, depending upon the size of the mine, closes it down (Creamer, 2010).
Future Scenarios for Gold Industry
Scenario 1: Gold’s Demand for Industrial Use Would Rise
Gold is highly valuable metal for science and technology. It has very wide industrial applications especially in the field of Biotechnology, Catalysts, Environmental, Electronic and Nanotechnology. Gold is considered at forefront of the upcoming Nanotechnology Revolution. It is because gold nano particles display very different and unique properties than in normal form. Nanotechnology is now considered as the major area of the future. Worldwide governments are spending billions of dollars in nanotechnology research (Keel et al., 2010).
Figure 13: Global Government Funding for Gold-based Technology
Probability: Low to Medium
There are still many breakthroughs needed before the real Nanotechnology revolution is realized and nanotechnology comes to the masses (Berube, 2006). Hence the probability for increase in gold’s demand for the industrial uses is low for near to mid-term future.
Scenario 2: War would cause the Gold’s demand to rise exponentially
War and Gold have very close relation. Whenever there is possibility of war somewhere, the investors run to invest heavily on gold as it is considered as the safe haven for their money (wiseGeek, n.d.). Hence this causes the gold’s price to be rise sharply (BBC News, 2002).
Today the world has become relatively safer than the past due to modern societies antipathy towards war. And the possibility of any significant war to arise in any part of the world is very low.
Scenario 3: Gold’s demand would witness a slight fall
Gold has an opposite relation with the global economy. In times of growth the investors chose to put their money on stocks and bonds and the gold prices falls. And in bad times investors consider gold as the safe-haven to store their money.
Figure 14: Future Forecast for Gold Industry
The world recently exited from a major economic recession. This recession caused the gold price to soar. Hence the demand for gold will exists for couple of more years but as the world witness sustained period of stability this demand will ultimately fall.
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