From Gold to Uranium: How High Inflation is Affecting Prices and Companies

How inflation is impacting precious metals prices and miners

Gold — Mining costs high, but price providing support

In the resource space, the inflationary tone that set in during the second half of 2021 has raised many questions. Chief among them is why inflation hasn't proven to be more of a price catalyst for gold.

“If people are wondering why gold hasn't really taken off, given the very marked, very real rise that we've seen in inflation, I think the real rate story counters that,” Metals Focus Director Philip Newman said during an early December webinar. “(Real rates) are neutralizing the benefits that the inflation story should bring.”

By the end of 2021, the yellow metal had shed 3.64 percent, and it has not fared much better so far in 2022, dropping an additional 1.7 percent over the month of January.

With the yellow metal flatlining, gold miners are facing higher costs without the benefit of a higher gold price to help offset these increased expenses. However, the news isn't as bad as it sounds.

Adam Webb, director of mine supply at Metals Focus, told INN that mining costs climbed to an eight year high in late 2021, but noted that gold is still at a historic high point.

“Our latest data shows the average all-in sustaining cost in the gold-mining industry reached US$1,123 per ounce in Q3 2021,” he said. “This is an increase of 16 percent year-over-year and the highest levels since 2013. However, despite higher costs, industry margins still remain relatively high because of the strong gold price.”

Adam Perlaky, senior analyst at the World Gold Council, shared a similar viewpoint.

“Input costs certainly impact the profitability of miners, but so does the price of gold. When the price of gold changes, miners can adjust the quality of ore they are mining,” he said. “It is very much a function of supply and demand. As input costs rise, it becomes less profitable to mine, but a higher gold price will often mitigate that.”

Silver — Effects of inflation less strong for white metal miners

Looking over to silver, Webb noted that by nature these companies are less susceptible to inflation volatility.

“As with gold miners, inflation will push costs up for silver miners. However, silver mines often produce significant quantities of by-product metals, usually zinc, lead and gold. Zinc and lead prices have increased significantly this year, and this has pushed revenues higher, offsetting cost inflation and pushing margins for silver miners up.”

More broadly, Steven Burke of FocusEconomics reiterated the idea that real rates are balancing out inflation. He believes that as interest rate hikes reduce inflation, silver demand will decrease.

“At the moment, inflationary pressures are largely priced in, and markets are now honed in on the US Federal Reserve’s intentions to end its (quantitative easing) program and raise interest rates — which would stamp down inflation expectations and silver demand in turn,” the economist said.

He went on to note that some of the price pressure that was on display in 2021 was viewed as transitory, but ended up sticking around for longer than anticipated.

“As government stimulus measures boosted accumulated savings in most major economies for the majority of 2020 and early 2021, consumer spending was heavily concentrated on goods — in particular durable goods — as the services sector was still feeling the pinch from lockdowns,” Burke said.

Hiccups stemming from transport issues sent shipping container costs and semiconductor prices surging amid the reopening of many factories. According to Burke, this put manufacturers in the driver’s seat when it came to price setting, while supply bottlenecks and material shortages sent prices for suppliers soaring.

“The latest wave of new COVID-19 (Omicron) cases poses a severe threat to supply chain disruptions, and inflation will likely remain elevated in the short term. But given a less favorable effect, inflation should peak in Q4 2021,” he commented to INN. “Consequently, moderating price pressures pose a downside risk to silver prices by lowering its attractiveness as a hedge against inflation.”

Platinum — Hard asset demand could stoke buying

In terms of platinum, the World Platinum Investment Council (WPIC) expects platinum bar and coin demand to grow this year by 400,000 ounces. Speaking to INN in November, Trevor Raymond, director at the WPIC, noted that the group's product partners have seen strong demand for platinum investment products.

“What they're seeing is that the retail investor certainly sees the global risk remains high,” he said. “We’re not out of the woods of the pandemic, supply chains are compromised and inflation is a serious worry.”

He continued, "But what we do know is that the concerns about inflation just aggravate retail investor perception of risk. And certainly, the desire to have more hard assets has gone up.”

How inflation is impacting energy prices and companies

Oil prices high, but pain could be coming

While precious metals have had a mixed reaction to inflation, the energy sector has benefited, especially on the back of rising demand and transportation disruptions. Prices for oil steadily trended higher throughout 2021, starting the year at US$49 per barrel and ending the 12 month period at US$75.

Values continued to move higher for the first month of 2022, taking the oil price to its highest point since 2014. While inflation may make oil more profitable, as Dmitry Marinchenko, senior director at Fitch Ratings, explained, there is little room for energy producers to incur more overhead costs.

“Increased activity in the sector and general inflation could cause some pain for many producers,” he said. “Many companies have already dramatically decreased costs over the last several years, and now this trend can reverse.”

Other factors more important for uranium than inflation

For uranium, a key resource in electricity generation that has seen significant price growth in the last three years, inflation will likely impact production costs.

“Consumers spending less on gas is a very different thing from utilities deciding to pull the plug on baseload energy,” said Lobo Tiggre, founder of IndependentSpeculator.com.

“I do think inflation will affect operating costs of uranium miners, like all miners, but since inflation also tends to increase the prices of what miners produce, they often come out ahead. But in uranium’s case, I don't see general inflation being that relevant. It’s all going to be about BRICS (Brazil, Russia, India, China and South Africa) countries building hundreds more power plants while mine supply remains in deficit.”

Look beyond inflation to the mining industry's cyclicality

Regardless of the impact of inflation, the resource space is bound by the cyclical nature of boom-and-bust trends.

“Global macroeconomic developments and commodity supply factors will likely cause boom-bust cycles to continue in commodity markets,” the World Bank report states. “For many commodities, these cycles may be amplified by the forces of climate change and the energy transition away from fossil fuels.” While unavoidable, the researchers note that the duration of bust cycles is smaller, while booms are lasting longer.

“The analysis also shows that commodity-price booms since the 1970s have tended to be larger than busts, creating significant opportunities for stronger and more sustainable growth in commodity-exporting countries — if they employ disciplined policies during booms to take advantage of windfalls.”