UBS recently put out a number for the cost of producing an extra ounce of gold. As you can see on chart 1, the cost has skyrocketed from 2008 onwards to today. Costs almost doubled in 2 years time.
It shows us that if the gold price were to go to $1500/ounce, nobody would go out and search for gold as it would be unprofitable.
Chart 2 gives an operating cost of $700/ounce for gold, but it's important to notice that the large bulk of the costs go to construction, maintenance, exploration and taxes. Also note that the lowest gold went in 2008 is exactly at $712/ounce in October 2008, which was 10% below marginal cost of production at that time. That low in today's terms would be $1350/ounce.
With all of this in mind, I believe gold will never go below $1350/ounce. This will be the ultimate floor. If it does, it will quickly rebound.
And for people who are interested in the marginal cost of production in silver, it is around
$30/ounce as suggested in
this article. So I expect silver to rebound soon.
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