Do gold prices cause production costs? International evidence from country and company data

This paper analyses the causal relationship between gold production costs and gold prices using a set of country and company data collected at the individual mine's level. 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 to 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 costs conditional on the gold price; production costs thus follow gold prices.