Is Consolidation in the Gold Mining Industry Good for the Price of Gold?

The economic crisis of 2008 has had curious effects on the commodity markets and the spot price of gold. Those buying gold bullion, for instance, have noted that the price of gold seems to be behaving sluggishly during the initial downturn phase.

There has been an upturn in the activity of large mining interests buying up smaller mines. Some of these have been producing for some time, as has been the case with the recent investments in Australia's Rio Tinto and Oz Mining companies by large Chinese mining interests. Other acquisitions have been new explorations that have proven, or even potential as a source of gold.

In fact, the Chinese mining companies have been buying a lot of metals, precious and otherwise, in both Africa and the recently lucrative gold mines of Oceania, South America and South-east Asia. China is a very large player in the gold markets and is positioning itself to be in a controlling position. The odds of gold rising on this strong position are very good.

The rising price of Chinese stocks, propelled by speculative purchasing, has helped the Hong Kong stock market surge in the early weeks of 2009. The trend continues. Mining interests in China are supported by stimulus spending that isn't saddled with banking industry debt. China is also a major producer of gold bullion coins. Available in even tiny denominations, they have made it possible for the average consumer to begin buying gold bullion.

Most governments have an upper limit set on how much another country can invest in their gold reserves. Australia, for instance has a 14.99% cap on investment, that has been met by several Chinese investment groups. At least 10 large Chinese companies are interested in purchasing significant assets in international mining companies. In some cases these purchases have been made with partnership capital from western mining interests, such as Alcoa.

While buying gold bullion remains one of the safest places for individual investors to put their assets during a crisis (such as the current one), there are higher returns to be had with higher risk investments. Risk has not been on most investors minds since late 2008, but the prices of some speculative interests are low enough to warrant such investment at fire sale prices. Purchasing shares in gold mining companies is a way to hedge your risk, though the returns won't be nearly as lucrative as getting lucky with a more speculative venture.

Mines with proven returns are generally good investments, but they do eventually loose value as the ore is removed. They should be considered a short-term investment unless you purchase shares in a company that is actively acquiring riskier mining options.

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Mark Ortiz

March 10, 2009