Nicholas Larkin and Debarati Roy
Gold has further to drop in the rout that erased $66 billion (about R653bn) from the value of investor holdings and took prices below the level some mines need to break even.
The metal fell to a 34-month low of $1 180.50 an ounce on June 28. That reflects the biggest quarterly slump in at least nine decades as some investors have lost faith in bullion as a store of value.
It fixed at $1 252.50 in London yesterday afternoon.
Goldman Sachs Group says bullion will reach $1 050 by the end of next year and Credit Suisse Group expects $1 150 in about a year.
Danske Bank, the most accurate gold forecaster tracked by Bloomberg over the past two years, predicts $1 000 in three months.
With the total cost of producing an ounce of gold now averaging about $1 200 and billions of dollars written off the value of mining assets, some analysts anticipate contracting supply in the next several years, which may help halt the retreat.
“In the long term it will provide big support, but in the short term it won’t really make any difference at all,” said Charles Morris of HSBC Global Asset Management in London. “I’m still bullish long term, but I just think we’ve got a big nasty bear market in the meantime.”
The metal has fallen about 24 percent in London this year and entered a bear market in April.
In the six months to June 28, investors in exchange traded products sold a total of 586.5 tons, more metal than South African mines extract in three years. They held 2 045.4 tons valued at $81.8bn, down from a peak of $147.7bn in October, data compiled by Bloomberg show.
Hedge funds and other large speculators are the least bullish they have been in six years, with a net long position of 31 197 futures and options, according to data from the US Commodity Futures Trading Commission.
But they are also betting on a decline, holding a near record number of short contracts.
The scale of the bearish bets might magnify any rally as speculators closed out their wagers by buying back contracts, Macquarie Group said in a report on Monday.
The trading commission data included index fund investments. Once index funds were stripped out, speculators probably had a record net short position, the bank’s analysts said.
But UniCredit, a European financial services group, said some investors were getting less bearish because prices had dropped so much that mining companies might curb output and put a floor under prices.
The total cost of producing an ounce of gold was about $1 180 an ounce, according to UniCredit.
Société Générale said in a report on June 17 that the total cost of production included items such as depreciated capital expenditure, which were relevant over longer time periods, so measuring costs that way implied 44 percent of output was unprofitable at $1 150.
That was misleading because companies did not curb production on short-term price swings, according to the bank. A weaker rand and Australian dollar should help cut expenses, it said. Based on cash costs, about 13 percent of global output lost money at prices below $1 000, according to CRU Group, a research company in London.
“There are not many reasons to be bullish on gold,” said Donald Selkin, the chief market strategist at National Securities in New York.
“It can temporarily go below the cost of production if the liquidation continues. It will probably not stay at that low level and will at some point find a balance.”
Mark Cutifani, the former head of AngloGold Ashanti and now the chief executive of Anglo American, said in an interview on June 26 that production cuts would be larger than most investors expected and would eventually boost prices.
However, a contraction in the supply of gold may have less effect than for most other commodities because while oil is burnt and wheat is eaten, most of the 171 300 tons of gold mined is still in circulation.
According to Morgan Stanley, the supply from pits, recycling and sales of central bank reserves had exceeded demand for gold every year since 2006.
Another factor is that the 12-year bull market was underpinned by producers buying back hedges. This peaked at 117 percent of annual output in 2000.
Société Générale said the current slump might be exacerbated by mining companies forward selling their production to lock in returns, driving prices lower, spurring more sales and creating “a self-reinforcing, accelerated collapse”.
Demand from central banks, the biggest gold holders, might weaken because rising US bond yields and a stronger dollar would diminish the metal’s appeal as a way of diversifying their reserves, according to Société Générale.
Last year central banks added 534.6 tons, the most since 1964, data from the World Gold Council show.
Sales of coins and jewellery surged around the world after the bear market began, spurring a 13 percent rally in prices in less than three weeks.
But there are signs that physical buying has slowed, with the US Mint selling 19 percent fewer ounces of American Eagle gold coins last month than in May. – Bloomberg