Today's bounce back in gold prices is fading into the close and as Barclays' Suki Cooper notes, despite some physical demand response to lower prices, it has not been sufficient to combat the overall decline. In the absence of support from physical buying, where does fundamental support materialize? Should gold just put on its commodity hat, instead of its increasingly more popular currency one, its cost of production should provide some guidance.
Via Barclays' Suki Cooper,
Last year, the average cost of production was $673/oz, and the marginal cost of production (90th percentile) was $1104/oz (Gold cash costs drive higher, 22 March 2013).
Assuming sustaining capex at around $200/oz, this indicates cost support at around $1300/oz, based on last year’s data; our global database encompasses 35% of global production.And Bloomberg has a couple other banks homing in on the same number:
Should prices dip below marginal cost, around 10% of production under our cost curve becomes cash-negative, representing an estimated 262 tonnes of cash-negative gold production globally. The bulk of this at-risk production is from South Africa, according to our database. Also putting pressure on gold prices is the acceleration of ETP outflows, which have already reached 66.5 tonnes for the month-to-date (until 12 April 2013). Nearly 320 tonnes of gold ETP holdings are cash negative below $1400/oz (assuming only those shares created above $1400/oz have been redeemed above $1400/oz, thus, this estimate is likely to be greater).
Although a reduction in mine supply would need to counter the supply from ETP outflows, this has raised the question whether producer hedging could gain traction....MORE
Gold Miners Approaching $1,300 Pain Threshold
Gold miners led by Barrick Gold Corp. (ABX), the world’s largest, will likely accelerate spending cuts and trim high-cost output as the metal’s biggest plunge since 1980 threatens to make about 30 percent of production unprofitable.Hey, it's not management's money.
Gold futures fell 9.3 percent to settle at $1,361.10 in New York yesterday, taking losses to more than 20 percent since the record close in August 2011 and meeting the common definition of a bear market. The average so-called all-in cost of 20 gold producers was about $1,306 an ounce in the fourth quarter, Toronto-based analysts at Dundee Capital Markets said in an April 12 note.
“Below $1,300 gold, about 30 to 40 percent of mine production is probably not cash-flow positive,” Joseph Wickwire, the Boston-based manager of Fidelity Investments’ Select Gold Portfolio fund which has about $2.14 billion under management, said yesterday in a telephone interview.
While producers have enjoyed 12 consecutive annual price gains as gold surged more than sixfold from $273.60 an ounce at the end of 2000, profit margins were squeezed last year by soaring costs that increased faster than the metal.
Gold companies were unloved even before the price plunge, having underperformed the precious metal for each of the past six years after money-losing takeovers and over-budget projects and as investors plowed billions instead into gold-backed exchange-traded funds....MORE
One sign of trouble last November:
Barrick Gold's Chairman Selling Toronto Home ($25 Mil.) ABX