Gold Plunges!

Pivotfarm's picture

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Gold has gone down Friday to under $1, 200 an ounce and that means it’s reached its lowest point for the past three years. Worse than that: it’s been the worst quarterly performance for gold for 45 years! But the mere mining of gold is now just under the market value of gold and this could have serious consequences for people working in that sector. Gold is almost at production cost today and if that stays there while the markets readjust, then it will be cause for concern for those working in mining.

The ‘All in Sustainable Cash Cost’ of gold, or the cost per ounce for a company to mine gold, is roughly $919. However that is for the US, where it is the cheapest to produce gold. In Africa, the level at which mining gold becomes profitable may be as high as $1, 300. The cost of gold production is broken down into the following areas:

  • $610 represents the direct cost of mining the gold.
  • $156 for mine development expenditure
  • $121 for sustaining Capital expenditure (to upgrade physical assets such as property).
  • $50 goes to gains made under currency hedging.
  • $44 administrative costs.
  • $44 goes in royalties (investors buy royalties and provide capital to the mine for future production and then they are paid back in royalties).
  • $29 for by-product credits.
  • $11 for the mine on-site exploration.
  • $26 for rehabilitation and accreditation.
  • $14 for other expenses.

Gold is most economically produced in North America, then in Europe. Africa is the most costly place to mine gold.

In some places in the world there has been a doubling in the cost of gold production over the past five years and it now stands at a world average of about $1, 000. Obviously, smaller mines are having greater difficulty in keeping up with that or will do in the future if the prices remain where they are. They may have to end up closing down. The only ones that will be able to maintain any sustained production will be the larger companies or the ones that have good cash flows and that might be able to prop themselves up for a while. There is also the added problem of the fact that fixed costs in the industry have seen a rise in recent years. Salaries, in particular have increased.

Gold has fared badly over the last quarter quite simply because of the Federal Reserve’s decision to cut Quantitative Easing by 2014. Analysts suspect, however, that it would be impossible for gold to fall further or to even go under $1, 000 an ounce as this would mean that the vast majority of mines would then turn unprofitable and definitely close. However, impossible always tends to happen right when it’s not being expected. So, will gold fall below that price of $1, 000?

Analysts also believe that the price of gold will automatically stabilize when mines go into liquidation and there are cuts in gold production. Reducing supplies of gold on to the market will lead to a rise in the price and greater stability. But, in the meantime, there will be miners that lose their jobs and mines that close leaving only the big fish to snap them up once the price of gold returns to better times.

The fall in gold prices has certainly been brought about by the end to stimulus that has been announced and which seems to be edging closer in the light of economic data revealed yesterday regarding US incomes and consumer spending, in particular. Even if the progress is tepid to say the least, it reveals that the Federal Reserve will withdraw Quantitative Easing as planned. That means that people will be leaving gold as it will no longer be just a safe haven to place your money while the economy gets back on track.

Consumer-spending data in the USA showed an increase of 0.3% in May (which was the opposite of April’s 0.3%-drop). After inflation, adjustments, spending rose by 0.2%. In the first three-months there was an increase ineconomic growth of 1.8%, which admittedly is not much. That’s sluggish. Consumer spending may have been helped along the way somewhat by rising prices of real estate in the USA. Given the fact that it was this which was one of the triggering factors of the financial crisis, Ben Bernanke is looking at it as a good gauge of what the state of the economy is like. This has a positive effect on consumer confidence. Average housing prices increased by 12.1% ending in April in comparison with last year. April has seen the largest monthly gain for six years (+2.5%). Housing prices are increasing perhaps some suggest due to the fact that there is a current shortage. The US population has increased by 12 million over the past 6 years, and there has been a cut in the building trade and real-estate sector regarding new homes being built. Rising house prices will mean that the economy is getting back on its feet, some will say. Incomes in the USA also increased by 0.5% and that means it was the best increase since February.

But, the President of the New York Federal Reserve Bank, William Dudley, did state yesterday that if economic growth were under what the Federal Reserve has predicted, then Quantitative Easing will more than likely continue.  Just last week, the Federal Reserve predicted a fall in unemployment to even below 6.5%, which would mean that the US was back in the boundaries of healthy. That is for 2014, which still means that it is a year ahead of what was previously predicted. March’s forecast of economic expansion in the US was raised and is now situated at between 3% or 3.5% for this year.

Gold falling in price has brought about a fall in the Australian Dollar also as a knock-on effect. It was down this morning to 92.76 US cents from 93.17 at yesterday’s close.

Australian Dollar

Australian Dollar

Some South African mining companies (where mining is the most costly) have already lost over $10 billion so far this year. This will bring further fears of the consequences of the future of some mines to the very forefront of their agendas. In some cases, South African mines are having also to deal with wage demands of over 60% this year. Gold prices have fallen by 25% this year.The South African Rand may also come in for a knock-on effect like the Dollar, and it is also down today by 0.26%.

South African Rand

South African Rand

So, the economy looks like it is picking up. Quantitative Easing will be withdrawn and gold will no longer be a good option.

The question is now: will the prices continue to fall and will they be greater cause for concern even more so than at the present time?

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hyperbole2000's picture

The big financial megoliths are selling there gold as their hypothicated and levergaed long debt falls in value breaking loan convenants and creating cash demands to avoid loan contract breach.

When they run out of gold to sell they have run out of time.  When the gold price stops falling the convenat breaches start and the vacuous financial dominoes start falling.



Stuck on Zero's picture

Keep in mind that for every gold seller there is a buyer.  Who are the buyers?  Clearly, current buyers are not a bunch of dupes.


Atlantis Consigliore's picture

Hitler video, its time, for the Hitler Investor Video, Gold/Real Estate. 

Bastiat's picture

Silver +4.75% a few minutes ago

SmallerGovNow2's picture

and i just bought 100 oz yesterday!!!  timed one right...

SWCroaker's picture

As a long time, multiple BTFD fellow shiney holder, ....   just wait a week.       Gotta change my handle to Eeyore.

joego1's picture

175 here saved a buck an once on maples! Smaller government is right on!

Orwell was right's picture

I rarely resort to profanity, but I can't help it.   PivotFarm is a God Damned idiot!!!!

"Just last week, the Federal Reserve predicted a fall in unemployment to even below 6.5%, which would mean that the US was back in the boundaries of healthy. "

What is this fool smoking!!   He repeats a bit of commonly available information about gold costs, then launches into a meaningless couple of paragraph about "the economy".     

ZH would be better served just to give this idiot a free link back to his website, and eliminate his stupid articles.  

Short Change's picture

The whole thesis is backwards... It would have been wise to invest in equities DURING QE because equitites were being artificially propped up - ride the gray train along with all the other banksters.  Now that QE is "ending" equities are going to lose support and gold is by far the best bet.  It's like a game of chicken with Benshanke. You can ride the Chevy all the way to the precipice, just gotta know when to bail out and enjoy all the glory sex.

Inthemix96's picture


I'm not admonishing you here friend, but you must be new round these parts.  I only resort to profanity when needed myself.

Theres a strong chance you might not have read one of my replies.

Thats not profanity mate, not by a long shot.


Turn it up a little.

Al Huxley's picture

Yeah, same here, I only use profanity when needed to emphasis how fucking pissed off I am at the rotten cocksuckers in running the world's financial institutions, and their filthly little lapdog lackeys in the financial media, who's sole function seems to be to choke the fucking idiot general population with dogshit 'analysis' that lets them accept otherwise fucking incomprehensible market movements (eg:  'Massive supply shortages in India, as price crashes due to lack of demand').  Also sometimes I'll resort to profantity when the constant fucking destruction of fundamental western values (like say, not being spied on, imprisoned without trial or tortured) get thrown out the fucking window in the blink of a fucking eye, by a fucking moronic population more concerned with some bullshit sense of 'security' than freedom and will gladly bend over and get fucked up the ass by the government, as long as somebody with an expensive suit and an official sounding title tells them its for their own safety.


Other than that, I generally refrain from using profanity as well.

SmallerGovNow2's picture

LMAO at "I only resort to profanity when needed myself."  Fucking hilarious Inthemix....

Never One Roach's picture

AAPL ... down 40%


Oracle and Blackberry also plunged (Blackberry down 18% this morning last time I looked)


mmm...seems like a trend


Caveman93's picture

Please, keep selling your gold. If it goes down to $1.00 an ounce we'll all be much happier soon and when QE675 kicks in, I won't have to work ever again.

FlyOverCountry's picture

So how were gold mines profitable for 20 years (1981-2001) when gold prices were flat at around the $300 range?

BigJim's picture

 So how were gold mines profitable for 20 years (1981-2001) when gold prices were flat at around the $300 range?

A lot of them weren't.. hence miners like AngloGold losing $6 BILLION to buy out forward sales they'd made when the price was low.

Colonel Jessup's picture

Do you work for CNBC sir? If not, you should immediately apply for a position as a presenter in an afternoon time slot.

It's called inflation - inflation in materials needed to mine gold, and inflation in wages, etc. Coupled with money printing, which debases the currency in general, and drives the previously mentioned inflation on production costs in spcific.

Not that hard to figure out.

Midasking's picture

These are the same arguments that we heard in 1999. You keep the paper I will keep the gold.

fijisailor's picture

You don't remember when gasoline was under $1.00 a gallon?

Imminent Crucible's picture

So how were gold mines profitable for 20 years (1981-2001) when gold prices were flat at around the $300 range?

Gold prices were flat near $300 for those 20 years? Dude, if you'll just get your head out of the birth canal we'll consider you a viable fetus. Gold prices oscillated wildly between $250 and $600+ during those two decades. And now multiply those prices by about 3X to adjust for inflation from 1981 to present.

vmromk's picture

The economy is picking up and gold will no longer be an option.....Hey Pivotfarm.....GO FUCK YOURSELF and your horseshit "analysis".


Go suck Bernanke's cock, you deserve it.

simpleminds's picture

There were profitable mines at sub $500, and there will be again.  I think his analysis is relying wrong assumptions.

FEDbuster's picture

Could the costs of mining changed since $500 gold ten years ago?  I tend to agree that the average number is around $900-$1000 per oz refined, some mines less some more.  One of the bigger copper mines around here has a significant production of silver and gold as a by product of the copper minning.   When gold and silver are just "icing on the cake" how do you determine their cost? 

greatbeard's picture

>> There were profitable mines at sub $500,

So if one mine can make a profit at $500, all mines can make a profit at $500.  I get it.

BigJim's picture

Of course! Because those sub $500 mines can supply infinite amounts of gold, so everyone else has to match their price.

Simple, this economics stuff.

akak's picture

And just what was the US dollar worth (compared to its deflated value today) when those mines were profitably producting gold at $500? 

Merely throwing out the figure of $500 is meaningless without a reference to a particular year, as the US dollar (or any other fiat currency), which is and always has been constantly losing purchasing power, is NOT a stable measure of value.

Quinvarius's picture

Unfortunately for your analysis, the dollar is infact hyperinflating, our debt is growing by 1 trillion a year, bankers are coming up empty on gold deliveries, and the global economy is crumbling.  I'd rather buy the baseline asset here as the world burns and bankers try to cover it up.

dark pools of soros's picture

There are a few more steps that have to take place before hyperinflation and they may not happen

If the rich don't panic then you won't get a currency crisis... poor people do not make this decision

SWCroaker's picture

Bail-ins are sort of devised to stick it to large concentrations of money.  Like the rich, and businesses.       But we are done with those, .... right?

dark pools of soros's picture

that would describe a panic situation correct?   I didn't say they won't panic ever..  I just said the poor can panic all they want, and it won't change anything

Quinvarius's picture

I don't think anyone needs to "panic".  People just make rational decisions on how to make their piece of the pie bigger.

disabledvet's picture

um...I think we need to start looking beyond the collapse in the price of gold (can I say that again? "the price of gold has collapsed"???!!!) and start pondering the very profound reality of this Reality. Should the fall continue (and I think it will...perhaps dramatically) then obviously we are in the midst of DEflation. these things are very rare occurrences actually...obviously we haven't had one since World War II. the fact that we may be on the verge of one while the Fed has been spectacularly engaged in a process designed to prevent such a thing cannot be overstated. obviously if you believe in this thesis then you should be a VERY aggressive buyer of treasuries right here, right now. I would argue this because if the USA is showing this problem then obviously the world is in far worse shape. more to the point "4% looks pretty good here"'given what you can buy with it. that includes Army, Navy, Air Forces and Marine Corps of course. But also a healthcare program,social security, large scale privatization of state assets (toll roads), a consumer class, incredibly efficient production techniques (Japan), cutting edge name it. we shall see of course but this is truly something spectacular to observe right now and I'm surprised more people aren't commenting on it.

Widowmaker's picture

Deflation is king now -- hidden in plain sight.

"Taper-talk" from crooks is affirmation icing on the cake.


Imminent Crucible's picture

In deflation, money is relatively scarcer and harder to come by. Gold is the most durable, reliable and counterparty-risk free money there is, as long as you're holding it in your hand. Gold in a vault? Not so good. Ask the Bundesbank, which entrusted 300 tonnes of their gold to Fed vaults in New York.

Bundesbank: Please sir, can we have our gold back?

Fed: Of course. Give us seven years to, um, get it dusted off properly.

Bundesbank: Can we at least see our gold?

Fed: We regret that our vaults have no provision for accommodating visitors.

Bundesbank: Tell us you didn't lease it to the bullion banks to sell into the phys markets--do you even have our gold?

Fed: It depends on what the definition of "have" is.

Go Tribe's picture

Wait a minute. The last time gold fell we weren't in deflation, right?

Quinvarius's picture

We have not had deflation in 40 years.  The fact that everyone insists we are not inflating every 15 minutes on TV and in the media, while we obviously are, is all you need to see.  You have mouth pieces and the zombies who listen to them.

They wouldn't call it "being a survivor" if everyone figured out how to do it.  By definition, everyone else has to be slaughtered.

jover's picture

Can someone loan me around 10K dollars to buy MOAR?

fijisailor's picture

The dollar is stronger than gold.  I can issue you a letter of credit for $10k and you can buy your gold with that.

TerminalDebt's picture

buy as much as you can

I'll need you to hold it and sell it to me when the price hits $400

BigJim's picture

Why don't wait just a little bit longer, and then people will be giving it away for nothing?

And if you're a really patient sort of person, I'm sure not long after it hits $0 an ounce it's just a matter of time before people will pay you to take it off their hands.

RockyRacoon's picture

That's what chartists would advise, isn't it?   When the demand for physical curve matches the "price" curve I'll be concerned.  Until then...  buy, buy, buy.   Liquidations of paper gold don't mean much except that we can load up using fewer fiat dollars.