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Gold fever

Gold is one of the most significant precious metals in the world and serves as a reserve asset for central banks, a resource for preserving capital and a financial security tool. It is also used in industry and medicine because of its unique properties.

Cost situation

Although the gold price changes every day, it is believed that in the long term (more than 10 years) it is a low-risk investment and has a constant upward trend. Many financial experts consider gold to be a safe haven asset, which, unlike stocks, bonds and other financial assets, tends to maintain (or even increase) its value during economic downturns.

In comparison with 1990, the spot price of gold increased 5 times from $357 per troy ounce to $1960 as of 06/01/2023. As you can see on the chart, the price of gold began to rise quite sharply after 2004, which is due to the US dollar devaluation. In 2011, amid unrest in the Middle East, the destabilization of the exchange rates of major world currencies, the debt crisis in Europe and the inflation acceleration in different countries, the price of gold on the stock exchange set a new record and exceeded $1,700 per troy ounce and in a long time began to cost more than platinum for the first time. From 2013 to 2019, the average spot price of gold more or less stabilized and fluctuated at the level of $1,000 - $1,300 per troy ounce. However, due to a backdrop of the global economic downturn since 2019, the price of gold began to grow steadily and in July 2020 it updated record figures from 2011 because of the coronavirus pandemic: the price rose to $1,813 per troy ounce. Since the end of 2022, the price of gold has continued to rise and is more than $1,900. One of the main reasons for the current increase in gold prices by more than 10% compared to last year are the replenishment of foreign central banks of their gold and foreign exchange reserves, panic on world stock and commodity markets as a result of mini-crises in the banking sector of the EU and the United States, as well as the weakening of the dollar as a result of the Fed's hawkish policy.

Since April of this year, global organizations such as Bank of America and Credit Suisse have been calling for the purchase of gold saying that it is the most attractive investment asset and that now is the perfect time to invest in it. Analysts at UBS and Oanda believe that many risks in the world will have to stimulate demand, which will be a "win-win scenario" for the precious metal, the price of which may soon soar much higher than its historical maximum. 

We go along with their opinions and believe that the demand for gold will continue to grow by supporting high prices for the precious metal.

Global gold supply and demand

Following the World Gold Council, the supply of gold has exceeded its demand since 2014. A significant drop in demand was observed in 2020, when the coronavirus pandemic led to the suspension of activities in many areas, including the jewellery industry. The use of gold during this period fell by more than 40%. Only by 2022, supply and demand almost levelled off by the increased demand for gold from central banks and other institutions by 2.4 times hitting a record since 2010. At the same time, it is important to note that investments in the gold mining sector have been declining all over the world in recent years. This is because no new large deposits were discovered after 2017. Along with the global price pressure increase, the cost of production is also growing significantly due to the gradual depletion of gold mines. As a result, this leads to the fact that gold mining worldwide is gradually stagnating and limiting supply on the market. If new deposits are not found soon and gold mining companies do not take measures to increase profitability, this may lead to the preservation of the supply of gold at a limited level, which along with growing demand may lead to a subsequent even greater increase in prices.

According to the latest data, the countries use the bulk of the available gold for the production of jewellery - 47%, coins and investments account for 25% and 21% of the reserves of central banks.  In addition, with the beginning of the pandemic and the rise in the cost of many minerals, gold is increasingly regarded not as a raw material for jewellery making, but as a financial instrument. 

As a result, we believe that this year the world's central banks will continue to replenish their gold and foreign exchange reserves, which with the growing investment attractiveness of gold will lead demand to exceed the supply by the end of the year.

Gold mining in Kazakhstan and worldwide

Deposits of gold-bearing ores are located in 120 countries. The average gold content in the ore is only about 3.39g per ton. According to Gold Fields Mineral Services, world gold reserves are 100 thousand tons and almost 50 thousand tons are confirmed. 70% of all world reserves account for 10 countries, including Kazakhstan (3% of all world reserves).

At the same time, if we talk about gold mining, then 80% of the gold mined in the world falls on 19 countries. Kazakhstan ranks 6th among them and accounts for 6% of global output. The leaders in gold mining in recent years are China, Australia and Russia. These countries account for one third of all production and each them exceeds Kazakhstan in production by 2.5 times. The remaining countries account for 20% altogether.

There are about 300 gold deposits in Kazakhstan and only half of them are operating. The deposits have been discovered in all regions of the country and the leading position is occupied by deposits of Eastern, Northern and Central Kazakhstan. 

The largest deposits are Vasilkovskoye and Bakyrchik. Vasilkovsky has proven reserves of 370 tons and the gold content in the ore is only 2.8g per ton. Bakyrchik has gold reserves of about 326 tons with a content of 6.9g of gold per ton of ore.

All gold deposits of Kazakhstan can be divided into 3 types:

1. Complex – about 38% of deposits are where gold is extracted as a by-product during the development of ores;

2. Gold ore or indigenous – 60% of deposits that are located in the earth's crust and formed due to magmatic processes are most often located in mountainous areas;

3. Gravel deposits – less than 2% are deposits formed in during physical and chemical weathering, activity of rivers, seas, glaciers, and most often gold there is a small particle.

The efficiency of processing gold-bearing ores mostly depends on the nature of the deposit, as well as on the gold content in the ore. The average gold content in Kazakhstan's ores is about 6.3g per ton in indigenous ores and only 0.4g per ton in gravel ones. In general, it is believed that extraction from gravel deposits is several times cheaper and requires less costs in the world since metal extraction is possible by washing in water. However, this method consumes sufficient fuel costs and this method is unprofitable and practically not used since there is very little gold in such deposits in Kazakhstan.

Production and use of gold in Kazakhstan

According to the Bureau of National Statistics, 39.4 million tons of gold-bearing ore and concentrates were mined in Kazakhstan in 2022 (+19.1% YoY), of which were obtained only 130 tons of raw and semi-processed gold, which is 12.8% more than a year earlier. 

The output of refined gold in Kazakhstan by the end of 2022 amounted to more than 73 tons (+9.9%), which is a record in recent years.

The largest gold producers in Kazakhstan are "Kazzinc", "Polymetal" and "Altynalmas", which together produce more than 60% of the total precious metal produced in the country. Following the Ministry of Industry and Infrastructure Development, Kazakhstan refineries have the status of Good Delivery on the London Metal Exchange, which indicates the high technological efficiency of production at these enterprises. Also in 2022, the gold mining company RG Gold launched a new mining and metallurgical complex, which is capable of processing up to 5 million tons of ore per year.

Most of the gold produced in Kazakhstan is used as a reserve asset (about 90% of the total volume). Thus, according to the National Bank, the results of the 1st quarter of this year shows that the size of gold and foreign exchange reserves is estimated at $36.2 billion (+8.1% compared to last year), of which gold accounts for 58.3% (68.7% a year earlier) in the amount of $21.11 billion; the foreign exchange part of reserves is $15.09 billion. The decrease in Kazakhstan's gold reserves is due to the regulator's intention to sell gold in foreign markets to increase diversification and balance the allocation of gold and foreign exchange assets.

A part of the gold in the framework of the Program for the sale and redemption of refined gold bars launched by the National Bank in 2017 is bought by the population. During the 1st quarter citizens purchased more than 330 kg of gold bullion, which is 6% more than a year earlier. Of these, 175 kg were bought in March, which was the highest record for the sale of bullion for the month. One of the reasons for such record sales growth was the bankruptcy of three large American banks at once that provoked panic in the world stock and commodity markets.

Kazakhstan also exports gold: 4.6 tons of gold were sold in 2022 (+6.1% compared to 2021) in the amount of 83.9 million tenge. It was bought by Kyrgyzstan (2.3 tons), Russia (2.2 tons), Uzbekistan (0.1 tons), Great Britain and Turkey. 

Thus, gold in conditions of increased global instability, when more and more investors prefer to go into conservative investment instruments, has become one of the most attractive assets worldwide. And this, in turn, affects its cost.

As for Kazakhstan, the rising gold prices positively impact on the development of the economy due to the accelerating business activity in the gold mining industry. 

However, issues of low productivity, lack of profitability, the need to introduce new technologies in production and improve infrastructure are still problematic. As a result, we believe that Kazakhstan gold mining industry does not use all the available potential, requires additional state backing and attracting new investments.

And in addition, we decided to consider gold reserves worldwide. 

There is gold worth $2 trillion or 31.7 thousand tons in central banks across the globe. The largest share of all the world's gold reserves is in the eurozone countries – they account for more than 50%.

In 2022, the investments of the world's central banks in gold increased by more than 2 times, which was caused by the geopolitical conflict that escalated in the world, which led to an increase in prices.

The map below shows the data of the top 15 countries in volume of gold included in international reserves for the 1st quarter of 2023 and Kazakhstan ranks 15th.

Globally, the largest reduction in gold reserves is observed in Kazakhstan, Uzbekistan, Russia, Bangladesh and Croatia. While most of all, following the results of the quarter, countries such as Singapore, China, Turkey, India and the Czech Republic decided to increase their gold reserves.

Klara Seidakhmetova

Senior Analyst

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