If Gold Was "Just A Commodity" What Would Be Its Support Price

Tyler Durden's picture

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.

 

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. Hedging activity over the past couple of years has predominantly been related to project financing.

 

Looking at the 20-year price low in 1999, when prices dipped to $252/oz, prices traded a third above the annual average cash cost. The average cost of production was quite stable in the 1990s but has risen by an average 16% y/y over the past five years. The marginal cost of production has risen by 69% over the past five years, rising by 15.2% last year.

 

Our cycle average forecast is $1125/oz (which denotes the cost-driven estimate of the minimum sustainable price over a business cycle) before taking into consideration sustaining capex, therefore, given that cost pressures are rising and labor disruptions persist, from a fundamental perspective, support comes into play initially at around $1300/oz before a substantial quantity of mine production is put at risk.

And of course, should the central banks of the world succeed in driving the price of gold to or below its costs of production (repressing yet another asset class into stocks) then we fear the repercussions will backfire from a combination of bankruptcies, unemployment, and as we have already seen in Africa - severe social unrest.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Gringo Viejo's picture

But it's not "Just" a commodity.
One may as well ask......
What if Spartacus had close air support?

AllThatGlitters's picture

Not sure you can call this a "fade" quite yet:

http://www.pmbull.com/gold-price/

It might be, but it remains to be seen.  If it rises from here, we have a higher low.  If it falls from here but bounces off yesterday's low, you may have a double bottom.

However, if it falls from here, and plunges through yesterday's low, well, the article provides a nice support level to look forward to, or perhaps a nice new buy point for the next paycheck to come in.

But as Gringo notes, Gold isn't "Just" a commodity, so perhaps the article, if read the right way, is really telling us that gold is screaming buy right now.  

kaiserhoff's picture

It's surprisingly difficult to get real time data, but here's a start.

http://www.gold.org/investment/statistics/demand_and_supply_statistics/

When I got serious about looking at demand, the real stunner was that India is still the leading player.

After Cyprus, that must be changing fast.

Pinto Currency's picture

 

What's the cost of production of a $100 dollar bill?

The market is being prevented from using it's choice of gold and silver as legal tender so that burning mound of paper is king for market transactions until it completes its self-immolation.

These paper currencies are all Ford Pintos with nitroglycerine in the fuel tank. 

JohnnyBriefcase's picture

Nitro-whaty?

 

I just wanna get the new iPhone 6 when it comes out. I hear it will have a retina scan locking system and laser guided txt capabilities.

Pinto Currency's picture

 

The i-6 also a button you can push to talk live with Steve Jobs.

Certified real by Ben and Barry.

Joe Sixpack's picture

See 15APR2013s inventory of 100 ozt. bars on APMEX graphically. People sure took advantage of the sale!

http://gold-silver.us/forum/showthread.php?27317-GSUS-APMEX-Precious-Met...

undermind's picture

Check out the cost over spot for silver eagles, if you can find them.

Kirk2NCC1701's picture

Just came from PM shop...

At 90% purity, the gold Eagles were the most common. Got the last Philharmonic and last Panda. All else on back order. One guy got 5 Eagles, and a 10 oz bar of Ag. Another took all remaining (20 silver Eagles).

An Indian woman, then 2 Indian guys (all from a known tech co., judging by their badges) got out the check books to place order. It's been that kind of a day.

Takeaway:  In spite of what some say about possible lower paper-gold prices, it won't matter!  At this point it, lower prices will do little to increase demand.  Supply chain is already stretched to limit.  A still lower price would only lead to a full bullion run, which would lead to...

 

 

SafelyGraze's picture

Dear Mister Durdenz,

Thank you for your interesting question!

First off, gold is indeed a commodity. That is, it's an asset. A collectible. Basically, it's jewelry.

But to your main point: how much would it cost? Well, we're glad you asked that.

Let's say gold is worth 1,400 dollars. Admittedly, that estimate is quite high, but we'll go ahead and use it for our example.

Now you might know already that those dollars cost money to produce. How much money? Why, you can find the answer to *that* right here, at the US Bureau of Engraving!

http://www.bep.treas.gov/uscurrency/annualproductionfigures.html

At 8.7 cents per not, you're looking at about 122 dollars to print up the 1400 you'd pay for an ounce of the shiny jewelry medium.

But wait. What if you pay with 100 dollar bills?

Well, that's a very good idea, Mister Durdenz! Because, through the miracle of high-efficiency printing, it costs the very same 8.7 cents to print a hundred dollar bill that it does to print a one dollar bill!

Confused? Don't be! Just be grateful for the savings!

Because now you only need 14 of those hundred dollar bills to buy that little old ounce of jewelry medium!

And at 8.78 cents per bill, that brings the cost down.

Way down.

For only a dollar twenty two cents, we can print those 14 hundred dollar bills with which to buy an ounce of gold.

And so there you have it.

The total cost is a little over a dollar for an ounce of gold.

All in all, you can probably find a better way to spend that dollar, can't you Mister Durdenz?

You sure can!

For example, you can shop at the dollar store!

Hugs,

Larry

http://www.bep.treas.gov/aboutthebep/officeofthedirector.html

 

Joe Sixpack's picture

How many ounces of gold can you buy with a $trillion platinum coin? How many angels can dance on the head of a pin? What is "is"?

PiratePawpaw's picture

Was Math an elective at your school?

PiratePawpaw's picture

Despite my advanced decrepitude, I continue to be amazed at how easily the masses will abandon reason in favor of herd metality....Has anything changed???...My silver still weighs the same...Central banks are still printing/spending like drunken sailors....I would still rather have a silver morgan in my pocket than a $1, $5, $10, or $20 Bernanke buck....If you havent sold, you havent lost anything.....Play with your MONEY occasionally and your family alot.....sleep well, I do.

Whalley World's picture

Sold?  I would suggest that the astute of this board took the opportunity to take advantage of the Tax Day Sale.  I just added nicely to my vault and will keep doing so, rise of fall.

Who exactly invested in Silver to sell now?  This is the decade to stack!  Long Eric Sprott.

mess nonster's picture

Go ahead. Buy that physical gold. Sure, it will be worth something, about 35/oz, when it gets nationalized (easier to say than "rehypothecated", although "stolen" is the bedrock term).

Fer fuck's sake, brain dead gold bugs, can you say "D E F L A T I O N"???

Sure, Ben's trying to blow a bubble, but there are too many holes in it. The gold hole is just one of them.

If gold holds its value, then its decline in fiat valuation indicates (conspiracies notwithstanding) that despite all the money printing, QE, etc, we're in a DEFLATIONARY cycle.

Good, God, do I have to give the reasons?

1. Peak Oil. Dont EVEN tell me about the Bakken or fracking. We just don't have cheap energy any more.

2. Population decline. Guess what folks, we've seen the peak of the planet's human population. It's all downhill from here. Less people means negative real growth, which means that the money supply will shrink, not grow.

3.Derivatives. Need I say more? Counterparty risk is everywhere, eating away at the money supply like a horde of radioactive earthworms.

4. More a symtom than a root cause, but...velocity. There's no fucking velocity! If inflation were the trend, there would be some money changing hands, but no, the speed pf money is just about... fucking zero.

5. Fukushima. Ionizing radiation is inherently bad for growth of any kind. Fukushima can only get worse, not better, with global consequenses.

So, yeah, buy that gold!!! If you are able to keep it from DHS, (and they will break down your door to confiscate it ), when you HAVE to spend it, you might be able to buy a loaf of bread, or a few rounds of ammo, per oz. Black markets operate strictly on market principles, and reality is a BITCH, bitchez.

I suggest buying arable land with water, and learn how to live a rural lifestyle. By "rural lifestyle" I mean "redneck", "cracker", "trailer trash" "sharecropper", and any other epithet for rural poverty you care to add to the list. Your garden, junk pile, and ability to make shit work with baling wire and bubble gum will be your key to successs, which will be ruthlessly redefined downwards from iPhones to beans.

Fucking gold...I shake my head. Buying gold is a vote for the status quo. Dream on!

 

AgShaman's picture

Fair value for gold is $42 bernanke bucks....if the nationalization/confiscation commences....

generics will get you 42 bucks

Artistic offerings like the eagles and buffalo's put out by the US Mint will be worth $50 bucks

buh-bye now....move along "Unwashed Soylents"

fonzannoon's picture

why would they break down my door to confiscate it if all the reason you gave deem it worthless?

Panafrican Funktron Robot's picture

Indeed.  And even if your average stacker, that might have 10 oz. if they really have their shit together, why would that be more desirable to confiscate than:

1.  401K/pension holdings.

2.  UST revaluations

3.  Unsecured bank deposits

4.  Property via mortgages

All of which are so much more profitable to confiscate.  I agree with the "bug" label for gold holders, we are a bug on the windshield vs. the total fiat valuation of all assets.  We don't matter nearly enough for anyone to even slightly give a shit.  

Unless, of course, it turns out that fiat itself is really the mother of all bubbles, and gold really is the only way to actually store wealth, even in a deflationary collapse.  

sablya's picture

There is a tremendous amount of money in the system, sitting there like water behind a dam.  Can you imagine any scenarios which would cause that money to start flowing?

 

First, why is it being held?  Because the cost to hold it is small.  There is no need to exhange it for goods and services because the future cost of those is the same as the present cost.  But, let the dollar begin to devalue and the dam springs a leak.  Let it lose a bit of its reserve status and it will be impossible to hide behind the BLS statistical machinations.  The leak grows a little larger.  It's a con-game at this point.  But once it starts to go, it's going to go very rapidly.  The velocity will go from zero to sixty in a few days.  The cost of holding dollars will become astronomical - just like in the Weimar Republic.  People will want to pay for their meals before they eat because it will be twice as much when they are done.  Then it will be too late to buy gold and silver.  No one will take your paper to even wipe their asses with.

 

 

 

democratickindeling's picture

I like your comment...one of those that make you go Mmmm.... in Zimbabwe they were paying for loaves of bread with grains of gold (so what's different?). I'm not sure leveraging the future tax receipts into T-bills or 'saving' companies making products nobody wants is sustainable... the Chinese are losing their appetite for US T-bills.

sooner or later the music will stop and there will be very few chairs left....

Peak Oils - perhaps THE most manipulated industry. Pop. Decline - Billions of useless eaters so food&water prices are rising... Derivatives - gambling? never understood them... Velocity? Money is being swapped for GOLD. Fukushima - you right, it's a game changer, Japan is screwed...welcome to 500 years of hell.

 

defencev's picture

Has anything changed???...My silver still weighs the same...Central banks are still printing/spending like drunken sailors....I would still rather have a silver morgan in my pocket than a $1, $5, $10, or $20 Bernanke buck....If you havent sold, you havent lost anything.....Play with your MONEY occasionally and your family alot.....sleep well, I do.

You sure can stay in your cukcoo land as long as it is feasible for you but do not expect the real world to follow your mad fantasies.

My observation is that more ignorant the jerks are the more difficult to kick them out from their world of pervert dreams.

PiratePawpaw's picture

Was there a point in there somewhere?........I was outside with the wife watering the garden and drinking coffee as we watched the hummingbirds and the sun setting on the lake. 

My point:....I already took care of everything else. I spend my extra adding to my stack....and yes, i sleep quite well because of it.....

Sweet dreams......

Jafo's picture

As a drunken sailor I object to your insinuation that we spend like a central wanker.  I stop spending when I run out of money.

Tapeworm's picture

 COST of production means nothing with a monetary metal such as gold. Silver no longer has a vast suplly overhang as does gold but cost of production is not a consideration.

 The writer did mention the backlash from ZA mines if they shut down from uneconomical production costs, but that is a political issue.

 The supply overhang is , or had been about 30 years of production. That is what makes gold the best monetary commodity in that supply has little to do with current price.

 As far as I can tell, none here were buying 1/!0 ounce "Eagles" in 2001 when they went for zero premium at 28.00/piece and that included shipping. That was below the cost of production and when taken with the minting and shipping it was way below the cost of just about any miner.

 Goldfields bought a pretty big whack of the bullion that the BoE was selling as they could not produce at those prices.

 I am saying that cost of production has a tiny effect on price of gold in the shorter term of a few years. The other PMs are far more geared to production price because of the small inventory of them as compared to gold.

 Vote me down all that you like, it is just a fact.

Tapeworm's picture

for those that bought glod in 1999-2001 there were some fantasy bargains to be had in buying stuff for glod.

 A house that I bought for considerably less than a kilo of glod gets me 1000/month rent

 I bought scientific instruments to give to a very small Lutheran high school that makes them better equipped than the rotten public schools that rip me off as a taxcow every year. The deals out there on truly good educational stuff for the youngsters that I do not know, but do care about were stunniningly cheap when measured in gold, so I did it. I attended that school for only one year back in the 1960's but did have fond memories of the way that we urchins were treated by the underpaid faculty.

 I never stole from those that follow me as have done most of the baby boomers. I try to inform them on what they can do to be free as much as possible anymore. I expect those of you that can help the worthy latecomers to the scams to do what you can for them too.

 Thanks

 

Urban Redneck's picture

Aparently the cost of $100 bill for Nomura is 1.8B euro, regardless of the number of worthless pieces of fiat involved.

Bankers worrying about their counterparties don't bode well for those hoping to avoid a repeat of 2008-2009

http://www.ft.com/intl/cms/s/0/63e3cab8-a687-11e2-95b1-00144feabdc0.html#axzz2QfNJyzZZ 

 

Which raises the question: if the banks won't extend credit, who is going to pay the producers to pull gold or oil out the ground and transport it to market, and what does that do to the available supply?

boogerbently's picture

Kitco:

Silver: NO Maple leafs, Silver American Eagles shipping ONLY outside USA.

NO Monster boxes.

Gold: American Eagles avail. Maple Leafs ONLY outside USA, American Buffalo ONLY shipping IN the USA.

astoriajoe's picture

they got plenty of those 1Kg koala plates though.

wtf am I supposed to do with that thing.

Joe Sixpack's picture

See 15APR2013s inventory of 100 ozt. bars on APMEX graphically. People sure took advantage of the sale!

http://gold-silver.us/forum/showthread.php?27317-GSUS-APMEX-Precious-Met...

ebworthen's picture

Yesterday (April 15th) was the last day for U.S. Taxpayers to allocate gold into an I.R.A. for the 2012 tax year (annual rape).

Stoploss's picture

It's the FED's scorched earth policy...

Kirk2NCC1701's picture

= Weapons of Metal Destruction.

WhiteNight123129's picture

Forget Gold guys, this is not where the weakness is.

They had to take it down to avoid the Japanese public rushing on Gold.

Now there will be some side effects to this take down. And the side effect could be another deflation in the US. And this time, oops, it is going to be bad.

Crushing Gold from the powers that be is stupid, it can create a self-fullfilling deflationary collapse. Gold shapes inflation expectations. If gold gets crushed further this is very very risky.

They might just have shot in their foot thinking they were doing something smart.

They could have chosen a nice stagflation now they might be in for a hyperdeflation followed by hyperinflation.

 

Bastiat's picture

Bernanke is like a god. He can fix all prices.  There will be no problem.

traderjoe's picture

All he needs is 15 minutes.

sablya's picture

This is a very insightful comment.  Thanks.  The law of unintended consequences strikes again.

unwashedmass's picture

 

"some physical demand"? hello? i was willing to drive an hour away today to pick up some physical, and there is NOTHING availabl.e 

some physical demand, my ass. 

Crash N. Burn's picture

Its Cheap! Buy!

 

So cheap gold and silver miners are facing extermination:

 

"...a month ago, at an international mining conference; we had a large group of geologists predicting roughly half of all these mining companies would go bankrupt in the next three months.

That was before the current, orchestrated slaughter....

..Yet here we have the same bankers who refuse to lend money to the gold and silver miners because “prices are too low” publicly declaring they are “shorting gold” because (supposedly) “prices are too high.” This comes as demand for gold and silver metal (not paper) remains at all-time highs. Even the myopic buffoons who call themselves “U.S. regulators” should be able to spot the corruption here."

 

CME Group Destabilizes Precious Metals Markets 

 

Methinks supplies are about to get MUCH tighter!

PhilofOz's picture

Well if I was a banker I'd be using the excuse that prices are too low to lend on, when all along they are thinking of the possibility of a smackdown and these miners would go under with their money anyway. They are banksters, they are never going to tell the truth.

Debugas's picture

instead of borrowing miners are supposed to be selling gold/silver and expanding in that way. If production costs are too high then they should lower them (lower wages etc) and if they cant then shut down

Soda Popinski's picture

One million dollars.  ( in the Dr. Evil tone)

Major Major Major's picture

A gold atom walks into a bar and the bartender says "AU, get out!"

boogerbently's picture

A priest, a minister, and a rabbi walk into a bar, and the bartender says, "What is this, a joke?"

Sudden Debt's picture

A man walked into a bar holding an alligator. He asked the bartender, "Do you serve bankers here?" The bartender said, "Yes, we do!" "Good," replied the man. "Give me a beer, and I'll have a banker for my alligator."

HulkHogan's picture

Ben Bernanke and a duck walk into a bar.

The bartender says, "Where'd you get that piece of shit."

Bernake says, "That's not a piece of shit, that's a duck."

The bartender says, "I was talking to the duck."

 

fuu's picture

If gold is a currency what is 1 hour of labor worth?