Monday, September 23, 2013

UPDATED--Gold is Going Much Lower

Update: "JPMorgan Says "Buy Gold", Conspiracy Theorists Dazed, Confused".
Original post:
Comex gold settled at $1,332.50 on Friday, off $36.80 for the session. After the close it traded down to $1325.60.
From Izabella Kaminska at Dizzynomics:

All that glitters…
Gold goes up on non-taper, gold goes down on taper.
Is it really that simple?

Though I suspect that even without tapering it won’t stay supported for long. This is because QE has finally created the conditions necessary to reward equity investing more than they do gold investing.

And without the likes of India buying, there isn’t enough liquidity heading into the market to support new highs. And new highs are necessary if you can’t hedge your gold positions at a positive rate.

The more QE happens, the greater the chance of negative rates on traditional risk free assets. But gold is a useless alternative if it can’t be hedged at a positive rate (i.e in a contango).

Gold backwardation is a market condition that deprives the gold investor from the ability to replicate a positive yielding safe security out of gold.

If you can’t own gold and guarantee a hedge that more than protects your capital as well as your transaction/position costs, you might as well put your money in: 1) the last remaining commodity markets which can simulate a positive yielding security via contango 2) price supported equities which at least do pay a dividend or 3)which are unlikely to fall too much in price because of continue Fed action or emerging market securities.

I feel confident that unless another EM country piles into the market or gold producers stop hedging, gold will be going to go down in dollar terms no matter what.

And gold miners are unlikely to stop hedging now that we’ve reached a point where more supply from them increasingly risks crashing the market....MUCH MORE including a small walk-on part by H.G. Wells.
One thing to keep in mind, there are a few measures of 'cost of production'.
As the Financial Times put it a on Monday in "Gold mine measure ‘to reflect true costs’":
Gold is being mined by some of the world’s biggest producers at costs that are higher than the price of the precious metal, according to a new measure that may become a benchmark of industry efficiency for companies and investors.

Several miners reporting earnings in recent weeks have revealed “all-in sustaining costs” of production of more than $1,200 per troy ounce, the price to which gold dropped this year. Some have shown an AISC of more than $1,400. Gold ended last week at $1,314 per ounce, having fallen more than 5 per cent during the week.

The AISC measure intends to show more clearly the full costs of getting gold out of the ground. Its adoption comes as this year’s sharp fall in the price of the precious metal has put the industry under more pressure than it has known for almost a decade and heightened investors’ interest in miners’ true profitability.

Goldminers, like other miners, have traditionally used “cash cost” – showing the cost of running a mine to produce a given amount of a metal – as a benchmark of their operating efficiency.

However cash cost measures have disregarded other expenses, from general office spending to some of the capital that must be spent to develop a mine, to keep it in production or to rehabilitate a site at the end of its life....MORE 
Although the new measurement is closer to reflecting financial reality and thus more honest in reporting, you can bet that some managements will use the cash cost bogey at least for periods up to a year meaning that there will be more supply coming out than if one used the AISC number.

The world-wide, all-in, sustainable number is just under $1300 per ounce as we saw in April's "Barclays: "If Gold Was "Just A Commodity" What Would Be Its Support Price?" (ABX; G; GLD; NEM)".
The next day we looked at some of the miners whose mineral target is copper or other base metals and who consider gold to be a byproduct; "Goldman Sachs on Australian Gold Miner Cash Costs". Some of these guys figure their cash cost at under $500/oz.

From June's "Gold Miners Have Just Started Outperforming Gold (GDX; GLD)":

I've mentioned that the ultimate bottom of this cycle could very well be the (nominal) top of the last cycle, the $875 print ($2360+ adjusted) in Hong Kong in January 1980. That would be far below the all-in costs of mining and even below just the cash costs alone  for some of the miners:
...Analyzing the all-in sustaining costs (total costs associated with producing gold), 2013 guidance of Barrick Gold, Newmont, Kinross, Goldcorp and Agnico Eagle ranges from $950 to a maximum of $1200 per ounce....

Just yesterday Russia's Polymetal estimated their cash costs at $725-$750....
Polymetal is in an enviable position to hedge forward production but haven't done so yet while Peter Hambro's Petropavlovsk hedged a bunch (technical term) at $1408 this spring.

Here's a deeper dive in June's "Gold Collapses, Approaching Gold Miners Cost Threshold (Infographic)":
...There is a saying in the commodity biz, "High prices are the cure for high prices" because price incentivises production. In the same way low prices can be the cure for low prices as marginal producers become uneconomic and stop producing.
As The Australian defined the terms a couple days ago:
All-in costs are much higher than the cash-cost method currently used by the industry because they add in sustaining capital expenditures, general and administrative costs, mine site exploration and evaluation costs, and environmental rehabilitation costs....
In the current market the South African producers have the highest all-in costs and will have to decide if they want to go into money losing mode. All of the country's miners save the largest have costs above the current price and the largest, AngloGold, is close at $1204/oz.

The Australian article ref'd above estimates that production would fall 10 to 20% at $1200 for any extended period but one survival strategy is to halt every expense that doesn't bring gold to the surface which gives the industry $3-400 breathing room for a while.

For 2012 Gold Fields Mineral Service estimated worldwide cash costs at $740/oz and all-in costs at $1150/oz.

Finally, here's an infographic we posted last month, cash costs for the 50 largest miners worldwide....MORE