Gold has been a key export for Australia since the late 1800s, with the country thought to hold 17% of the world’s total estimated gold reserves – equivalent to 9,500 tonnes. For the past decade, it has been the second largest gold producer in the world, following hot on the heels of China, and its resilience to the pandemic has allowed it to maintain steady production. It was even able to briefly claim the top spot as other nations recovered from operational delays and site closures.
Now, consumer demand for gold is on the rise, with retail and jewellery markets back on their feet, and institutional investment remains high as people seek stable assets to counter ongoing economic and geopolitical uncertainty. With Australia’s exploration investment at an all-time high and a number of new projects set to come online, the nation is poised to meet this burgeoning demand.
Gold in Australia
The last two years have been the best on record for Australia’s gold producers, with around 321 tonnes of the precious metal produced in the 2021 fiscal year. This upwards trend is only expected to continue, with predictions for production volume to reach 379 tonnes by 2023, and analysts saying that the country’s gold sector is going to grow at a compound average growth rate of 3.5% between 2021 and 2025.
Some effects from the pandemic were, of course, inevitable, and GlobalData figures show that Australian gold production only grew by 0.5% in 2020, as compared to 4.2% in 2019. However, rapid border closures, restrictions, and the federal government declaring the nation’s pits an essential industry all allowed Australia’s mining sector to not only stay open, but to remain relatively stable.
“The pandemic had a very limited impact on mining in Australia overall, as there was a relatively swift reaction from the government and key states – particularly Western Australia (which has the largest share of gold reserves at over 70%), where there have been very tight restrictions on access,” says GlobalData’s director of mining research & analysis, David Kurtz.
Similarly, Mike Rundus, EY Oceania Mining and Metals leader, says: “In Australia we saw a strong response to control the virus by the Federal Government, and mining companies worked closely with State Governments to implement appropriate protocols to keep the industry open…As such, practically all the mines stayed open.”
Production in the region is also supported by the fact that the government’s exploration budget is the highest it's been since 2012. Expenditure on gold exploration is of particular interest, amounting to a 10-year high of A$359m in March 2021, while analyst firm S&P Global Platts reported that Australia’s drill holes are currently the highest on record, also with a particular favour for gold.
All of this shows a strong rebound from any restraints imposed by the pandemic, but what is driving demand and why is production set for such a significant rise?
The ‘safe haven’ of gold
A primary driver of the uptake in demand for gold is the post pandemic revival of the jewellery market, which saw a six-year low in the second quarter of 2020.
“Gold demand is primarily being driven by the jewellery sector at the moment, following the ongoing economic recovery as the impact of COVID-19 lessens,” says Kurtz. “China and India are the main consumers and the revival of their economies is driving up jewellery demand.”
The World Gold Council similarly said 2021 was a “redemption story” for global jewellery, with “rocketing” demand from India in particular bumping demand in the fourth quarter of 2021 to its highest levels since 2013.
“The biggest factor underpinning retail demand for gold is rising incomes,” says World Gold Council regional CEO Andrew Naylor. “About 70% of demand for gold comes from emerging markets. And that's primarily Asia: China is the largest, followed by India, Southeast Asia, and the Middle East.”
Over the years, gold demand has shifted to Eastern nations as they see economic expansion, with gold sometimes seen as a more reliable form of currency than cash.
However it’s not only retail that is driving gold, and Naylor points to the fact that the metal is what is considered a "safe haven asset", receiving increased investor attention in times of instability.
“Alongside consumer demand, you also have investment demand, which is motivated completely differently” he says. “ It’s often motivated by economic and financial uncertainty and when the price of gold is rising, you also see a sort of tactical demand for gold. While institution investment demand fell last year, it’s held up this year for two main reasons: inflation and geopolitics.”
As gold is a physical asset that is relatively unimpacted by other asset classes, it makes investor portfolios more resilient to unexpected shocks. While the pandemic was one such shock, inflation seen across the UK, US, and parts of Europe – as well as unfolding Ukraine-Russia tensions – are similarly causing investors to turn to gold as a reliable investment.
“Gold has been a safe haven asset for some time now and with elevated trade and geopolitical risk we expect that to continue, especially with events such as the Ukraine conflict,” says Rundus.
Australia is well placed to meet this need as it was reported to have the world’s largest gold reserves in 2021, while a series of new projects set to open in the coming years show demand is in no danger of outstripping supply.
A golden opportunity
Currently, there are 100 gold projects under development in Australia, of which 11 are currently undergoing construction, with anticipated operation commencement dates between 2022–2025. Once all up and running, the sites are expected to add a combined gold production capacity of more than 1,166koz to the nation.
Key upcoming projects include the Red 5-owned King of the Hills operation in Western Australia, which is currently under construction and has an annual gold production capacity of 203koz. Newcrest Mining - the country’s largest gold producer- has also just completed its Cadia plant expansion, which has 344koz of metal production capacity and is expected to be operational by 2023.
“The Australian gold market was the world’s largest gold producer in the half year ending 30 June 2021,” says Rundus. “It has the world’s largest reserves and is forecast to grow at a rate of 8% over the coming years, propelled by both production from new mines and existing mine expansions.”
The one caveat to Australia’s blossoming gold industry is that, as is common with all commodities, deposits are becoming more difficult and expensive to mine, with miners having to go deeper and further to access high grade ore.
“In Australia, gold ore is generally becoming more difficult and expensive to mine as ore quality diminishes,” says Rundus. “A major portion of production costs for gold ore mining remain fixed and are significant, so the world price of gold and the value of the Australian dollar largely determine the industry's performance and profitability.”
Despite this warning, gold is set to remain a profitable industry for the foreseeable future, due to expand in Australia and beyond as nations get back on their feet. While the period of uncertainty is by no means over, it seems that gold will remain a consistent choice for investors looking for stability. With Australia still boasting the largest reserves, the nation is well placed to answer investor’s needs and remain a hub for gold.