Why Gold Could Rise as M&A in the Sector Intensify

Gold mining is a labor-intensive
business because most of the available gold resources are found deep inside the
earth’s crust. In fact, the cost of mining an ounce of gold has continued to
increase, with some companies spending more than $900. With prices of gold at
$1330, that means that the margins are thin because more work is required to
refine the gold.

To improve efficiency, gold
producers have been using a number of strategies. Some have been laying-off
workers while others have been forced to exit unprofitable mines. Others have
been forced to acquire smaller gold mining companies to accelerate growth.

The biggest gold miners have also
embarked on a strategy of mergers and acquisitions. In 2016, South Africa’s
Sibanye acquired StillWater in a transaction valued at more than $2.2 billion.
In 2018, Barrick Gold announced that it would acquire Randgold in a transaction
that was valued at more than $18 billion. This year, Newmont mining announced
that it would acquire Goldcorp in a transaction worth more than $10 billion.
Yesterday, Barrick Gold announced that it would acquire Newmont mining in a
deal valued at more than $17 billion. In response, Newmont’s mining CEO said
that the unsolicited offer was nonsensical. As the industry continues to go
through change, these transactions will likely continue.

Even with the current
transactions, the price of gold may continue being different than other
commodities. This is because it is mostly an investment product whose price
depends on the world economy. Unlike other metals, gold is mostly bought by
large investors and central banks to provide a hedge against inflation and
other uncertainties.

This year, gold has performed
well, gaining by more than 3%. This happened as the Federal Reserve turned dovish
and announced that it will be patient in making other rate hikes. This move was
viewed as being bearish for the USD.

On the chart below, this price is
along the 14-day and 21-day EMAs while the relative strength index has remained
relatively neutral at the 40 level. There is a likelihood that the pair will
retest the previous high price of $1350 in the near term.

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