Do Gold Prices Cause Production Costs? Evidence from Country and Company Data

Abstract

This paper analyses the causal relationship between gold production costs and gold prices using a hand-collected set of country and company data on gold mining. We find strong econometric evidence for causality running from gold prices to gold production costs. The results are supported theoretically by the small amount of annual gold production relative to the total stock and the real options embedded in gold mines. The low flow-stock ratio of gold implies low market power of gold mining firms and thus an inability to significantly influence gold prices. The real options enable gold mining firms to adjust production conditional on the gold price. Production thus follows gold prices.