ALWAYS VALUABLE

In the last ten days of March, gold, which is considered a secure asset amid high inflationary pressures and the Federal Reserve System's (Fed) policy of raising the interest rate, started to rise in price again. The banking crisis in the US is also intensifying. All of these factors are putting pressure on global reserve currencies. Investors are increasingly forced to use gold to hedge risks. Apparently, the global demand for precious metals will persist for quite a long time. Azerbaijan, which is expanding exploration and development of new fields, is likely to enjoy a steady income from gold and other precious metals exports.

Reasons for rising prices

In 2021-2022, gold did not increase in value significantly despite the rising inflation, as investors found more profitable instruments like protection against price rises amid the post-pandemic economic upturn. These are investments in real estate, shares, cryptocurrencies and commodity prices. For example, at the end of 2021 the price of gold was about $1,828 per ounce. Despite the price hikes in March-April 2022 (due to high market volatility because of the war in Ukraine), the weighted average price of the yellow metal at the end of last year remained about the same as before.

However, in 2023, many market assets stopped growing steadily. So investors' interests again focused on gold. For the first time since the beginning of the year, the price of gold on March 20 exceeded $2,000 per troy ounce. Futures on the New York exchange COMEX reached almost $2,015, but then went downwards and closed trading below the round figure. However, the upward price trend prevailed again, and June gold futures on COMEX rose to $1,978 per ounce on March 28.

Gold has historically performed well under conditions of hyperinflation. Even when inflation was barely above 3%, the price of gold often rose by 14%. But the main driver rising the value of precious metals has been the weakening of the US national currency since last autumn. Another factor was the increased demand from the world's leading central banks, which actively replenished their gold reserves amid an unstable macroeconomic and geopolitical environment.

Market participants also attribute the surge in gold prices to the banking crisis in the US and Europe. The trigger that pulled the gold prices in March was the bankruptcy of three American banks, one of which, Silicon Valley Bank, was among the top 20 in terms of assets in the US. First Republic Bank, which received a $30b bailout from a pool of 11 big banks, also faced problems. The US financial regulators promised the depositors of bankrupt banks to return their funds in full. For this purpose, the Fed will provide loans against the assets of these banks, which effectively means an additional unsecured issue of around $250b.

Similar developments have taken place recently in Europe. In particular, Switzerland's second largest bank (Credit Suisse) with a 167-year history, which faced a massive withdrawal of assets by its clients, was sold for nothing, just $3.24b. Clearly, the rescue of banking systems at the cost of injecting hundreds of billions of dollars will inevitably cause a spike in inflation, which will support gold prices in the long term.

The instability of the world's largest credit institutions has also affected other segments of the financial market. According to a recent report from Bank of America Corp, the crisis in the US and European banking sectors has led to a bubble in money market funds. Over the past four weeks, assets under management have risen by $300b to more than $5.1 trillion.

It is noteworthy that silver has been rising in price in parallel with gold since the second half of last year. In August 2022, amid the need for urgent support for green energy development, the US Senate passed the Inflation Reduction Act. It provides for a $430 billion investment infusion into solar power as well as other sources of renewable energy. Given that silver is a key component for the production of photovoltaic panels, the US legislative initiative and similar moves in the EU will inevitably lead to a long-term rise in prices for the metal. And while silver futures prices have fallen slightly to just under $23 by March 29, some experts estimate they could climb as high as $30 within a year.

New resources of Azerbaijan

Experts believe that high inflation, recessionary pressures and significant risks in stock markets and money market collapse will support global demand for gold and other precious metals this year. These factors are also forcing Azerbaijan to diversify its gold and foreign currency reserves. Given the high risks for the investment portfolio due to negative processes in the global economy and financial markets, the State Oil Fund (SOFAZ) has increased the share of gold from last year's 13.1% to 13.9% of its total assets. As a result, SOFAZ has reserved about 101.8 tonnes of gold by the beginning of this year.

At the same time, further growth in prices for precious metals promises Azerbaijan, which is expanding exploration and development of new deposits, a steady increase in export revenues. Anglo Asian Mining (AAM) and state-owned AzerGold operating in the mining segment of Azerbaijan's economy intend to adjust to the market trend. They plan to increase gold-bearing ore production at new deposits and its processing with the use of modern technologies.

Thus, holding the rights to develop eight contract areas in Azerbaijan Anglo Asian Mining last year increased production of silver by 17.8% - up to 182,046 ounces, while gold and copper recorded a decline of 11.4% and 5%, respectively. 

AAM recently updated its forecast for precious metals production in 2023 - according to the new data, the company plans to increase it from 63% to 71%. "This year we expect production of precious metals at the level of 50-54 thousand ounces in gold equivalent. This includes a target production of 4.1 to 4.3kt of copper and 30-32koz of gold. This year is a key year for the company, because with the opening of new Gilar and Zafar mines AAM is focusing on a significant increase in copper production," the company said in a statement. The latter is linked to a sustained increase in copper prices, and AAM intends to capitalise on the global energy decarbonisation agenda. 

From the fourth quarter of 2023, the company plans to start processing gold at Gilar. An additional 13 wells have been drilled at this contract area, which has increased the mineral resource estimate. This deposit can provide rich ore to the leach plant with an annual processing capacity of about 700,000 tonnes for more than three years. Gilar is estimated to have over 249koz of gold, 46,466t of copper and 48,786t of zinc reserves.  

Since last year, AAM has also continued appraisal drilling at the new Zafer copper-gold deposit and is preparing to intensify exploration at the Ordubad mine in Nakhichevan AR. AAM's output will increase further in the future as the company discovered a new sub-vertical Hasan gold vein south of the main Gosha gold mine. Last year, geological and structural mapping as well as planning for underground development of the vein was underway there.

Ten more fields

Apparently, AzerGold has even more ambitious projects to develop new deposits and increase production of base and precious metals. Last year the company increased the gold production to 62,100 ounces (+0.9%) and silver to 223,100 ounces (+65.9%). The focus on silver production is justified, taking into account the projected huge demand for this metal, as well as the demand from solar panel manufacturers. In 2022, CJSC demonstrated a positive trend in terms of sales of precious metals on international markets. The company sold 63,500 ounces of gold (+6.1%) and 207,800 ounces of silver (+56.3%). In total, AzerGold's total revenues from sales reached ₼960.7 million in 2017-2022.

In 2023, the state-owned company plans to maintain the production rate and produce a total of 62,500 ounces of gold. AzerGold, which was established by a presidential decree in February 2015, is engaged in the study, research, exploration, development and management of gold and iron ore sites Garadagh, Chovdar, Goydagh, Daghkesemen, Kohnamaden and Kurakchay basin.

Last year the company extracted ore at the Tulallar deposit in the Goygol district. The ore will be sent from there to a new processing plant. In the medium term, the plant also plans to process gold-bearing ore from the Narimanly site discovered in 2021. By 2029, it is planned to start production at ten more deposits: 4 for gold, 1 for polymetals, 3 for copper and 2 for iron ore.

The return of the Garabagh deposits

The preparation for the start of development at gold deposits in the liberated territories of the Garabagh region will also be important for the country. In particular, AzerGold is implementing a geological exploration programme there, which will last until 2025. Last year, the company finished the necessary preparation works there, including the studies of hyperspectral satellite imagery, remote sensing (non-invasive) surveys to identify potential deposits of gold and other precious metals in the disctricts of Kalbajar and Lachin. Ground works have also been conducted in the area cleared of mines and unexploded ordnance in the vicinity of Bashlibel-Khanlanli, Orujlu-Aghyatagh-Chorman. According to the latest reports, the first phase of works at Tutkhun noble metal deposit located in Kalbajar has been completed. Metallisation of gold, silver and partially copper of industrial significance is forecast in the East Zangezur economic region.

Anglo Asian Mining, the operator of the three contractual deposits at Souteli, Gizilbulag and Vejneli, is also getting more active in this area. The full assessment of the potential of the three contract areas will be made once the company receives permission from the Azerbaijani government for access. Besides, substantial investments will be needed for repair and restoration of mines, damaged during the 30 years of occupation. It should be reminded that Gizilbulag is located in the part of Karabakh economic region, where Russian peacekeepers are temporarily deployed. And the Azerbaijani side has repeatedly noted the fact that this mine continues to be exploited. Following discussions with the Russian peacekeepers' commanders, specialists from the Ministries of Economy, Ecology and Natural Resources, the State Property Service under the Ministry of Economy and AzerGold CJSC were to monitor the illegal exploitation of mineral deposits and the associated environmental consequences. However, due to the inaction of the peacekeepers, the monitoring did not take place. In protest, Azerbaijani eco-activists began a peaceful action on December 12 on the Lachin-Khankendi road, which runs through Shusha.

There is no doubt that Azerbaijani companies will start exploiting the mines that belong to Azerbaijan. Those who have been robbing our deposits all these years will be held accountable for what they have done at the international level.