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If Gold Was "Just A Commodity" What Would Be Its Support Price
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.
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Dear Ben....thanks
KEEP ON STACKING...
So the collusion among the Obama Admin, The Fed, and the TBTF banks are going "full fascist" with their de facto forcing the US public up the risk curve to buy equities, this is not a socio-economic bubble?
How could the Fedreal Gov't possibly pass ObamaCare, the new Amnesty (Immigration...haha) Bill, and keep the false premise of the benefits of "diversity for diversity sake" going and forced upon all students in the education system?
They must spend, spend, spend. Because the real damage of the impact of ObamaCare, Amnesty, and diversity for diversity sake is to the economic effciency of the US economy. Without LBJ's Great Society deficit spending... DEMS would have been voted out of office a long time ago. Without the $17T US federal spending deficit ? The economy would have to be run effciently in order for the job market and equity market to perform well.
The death and destruction that will eventually be the hallmark of pursuing these immoral policies..... has to be documented and placed at the feet of those who are now implementing them.
If someone in govt (fantasy) were to really grapple with the fundamental problem, they would do what Joseph did- stockpile 7-10 years of food.
The deflationary cycle has just begun, but this cycle is fundamentally different than the 1930's cycle. In other words, we can't borrow or print our way out of this one.
A responsible govt would stockpile food, and then, when things get really hairy, at least everyone could stay alive.
I suppose a combination of denial and inexperience with poverty, along with hubris, greed, and short-term thinking is the cause of the dithering and false hopes of the elite. They'll learn soon eneough.
meanwhile CBs are buying gold, because they have to protect the ASSET class, which includes stock equities. if gold drops too low in price private individuals will buy (horde) gold and that is deathdeathdeath to the global economic policy cabal whose purpose is to destroy savings.
they hate gold because it is the most illiquid savings. money converted to gold is money that wont be spent on their worthless bonds. they hate gold because it takes fiat off the market. which means they have to print more. but if the gold price drops and they keep printing fiat to fill the hole of disappearing cash, that creates a virtuous cycle of THEIR self destruction.
Simple Math says gold is under valued. The fed. is distorting inflation, with ZIRP/POMO policy.
LOL... your simple math sucks... no offense, but show it please as I need a good laugh. Fed is re-inflating bubbles, bubbles that popped, popped bubbles = money/wealth destruction. the fed has not created more money than was destroyed. they have changed moved the bubbles around a little like bubble in bonds has gotten much bigger and if that pops is very very very deflationary as will be insane amount of wealth destruction.
Thanks for taking the time to re.edumacate me. Perhaps you can unlock some of that " Fannie/Frediee" dark inventory?
so your argueing freddie and fannie hiding losses is bullish on gold? so the fact that they need MORE money to realize loses is NOT BULLISH for gold? um... this is making my point exactly. this is money that has been destroyed that they have to throw MORE PRINTED MONEY into the hole, to replace money that has ALREADY disappeared, and hence CANNOT drive inflation.
PLEASE LET ME SEE THE "SIMPLE MATH!!!"
his 'argueing' what...?
I'd like to know how much of gold's run up to 1900/oz was due to its securitization. I mean, physical bullion is one thing, but speculative trading in paper backed by gold (supposedly) is another. Paper prices are what they are but without ETF accumulation of gold due to demand by investors to speculate in gold without actually owning it the physical price would be lower. I mean, how much of the gold market was inflated based on the fact that investors that normally wouldnt have invested in gold did simply because it was easy to trade, through GLD, PHYS, CEF etc.... and how many brokerages sold these investing tools to their clients as a hedge against inflation all the while taking a percentage for "fund expenses" and watching the money pour in, profiting big time from the common investor who had no clue what they were doing. What would happen if we returned to gold/silver ownership rather than paper trading? My guess is physical prices would be much lower. Look at the premiums for owning physical. Storage of coins and then ultimately if you need to sell for some reason, your options are somewhat limited (liquidity concerns). Yes, central banks would still hold gold. Yes, US banks would still hold gold. But how many hedge funds and common investors would hold gold? This is the big question you need to ask yourself before saying "dont look at the paper price, hold physical" If the market was based on physical demand, dump another 70 million ounces out there (ETF gold holdings) and see where the market price goes. Basically, paper trading supports physical demand and physical demand keeps paper trading relevant.
gold was stable around 300/oz in 2000, and went up 6+ times, no matter how agressive your inflation estimates for the same period you cant come close to that number. so was clearly a bubble in gold.
and that clear bubble probably caused the balance sheet of the fed
and the national "debt"(money supply) of the u.s.a. to go parabolic.
no?
In 1980 gold accounted for about 5% of peoples portfolios, today its about 0.5%. When the Cash4Gold shops become Gold4Cash, I'll be ready to say the "b" word.
Please, get your numbers straight. Gold averaged around $400 from its early '80's drop to 2000, then dipped to <$300 on England's much trumpeted "sale". Inflation of 4X from the early 80's is probably an underestimate judging from gas and other consumables. Gold at $1600 plus, especially looking forward and considering costs, is reasonable. Much higher if we have a currency crisis.
Well... let's compare commodity price increases shall we? Inflation should affect all commodities within reasonable ranges, and when we compare gold/silver's change compared to other commodities we see this:
Average corn price per bushel in 2000.... ~ 1.85/bu Today its about 6.40/bu (245% increase) I know corn can be very volatile, but for the sake of comparison I used it.
Average domestic gasoline price in 2000.....~$1.80 to 2.00/gallon Today it's about 3.50/gallon (about an 84% increase)
Average domestic oil price in 2000....$27 - 30/barrel Today it's about 90.00/barrel (216% increase)
Average physical gold price in 2000....$270 - 300/ounce Before the massive correction 1600/ounce (561% increase) and at 1900/oz (666% increase). After the correction, 1375/ounce (482% increase). To stay in line with the increase in oil, which was 216%, gold would be 900/ounce.... Notice the value of oil in 2000 and the value of gold in 2000. Gold was a multiple of 10 higher than oil. If that stayed consistent, gold would be 900/ounce.
Average physical silver price in 2000....~ $5.00/ounce Before the massive correction silver was range bound in the 28-35 area, so i will call it 31/ounce for simplicity. Thats a 520% increase and at its high in 2011, an 884% increase! Wow. After the recent sell off, silver is at 23.50, which is still a 370% increase. Based on the 50-1 gold to silver ratio and gold at 900/ounce, silver should be.....drumroll please.....18/ounce a 260% increase which is much more in line with oil and gold.
What's scary is gasoline has lagged all other commodities in it's increase since 2000. Even at 4.00/gallon it's in line with other commodity increases, so it looks like gasoline is a bargain at these levels!
Either gold needs to come down further or oil needs to rise, and with oil rising so does gasoline. So which way do u think the market will head? Im guessing gold and silver will find itself back in reasonable price ranges, around 900 to 1000/ounce and 18-20/ounce before we go back up. Its been overbought for 4-5 years in anticipation of massive inflation, which hasnt happened yet. Global deflation is on its way instead. So.....gold and silver will come down to meet oil soon.
very good analysis. Look at how Russia president and prime minister gathered the cabinet to discuss the coming slow down in the economy due to expectation of further falling oil and gas prices.
I could say either gold going down more or USD losing reserve status but countries like russia highly depend on imports of final goods so at least in the short term (5 years or so) they will be forced to continue to sell energy at lower prices which will allow dollar to float longer
P.S. But ultimately Bernanker could fly the helicopter any moment and everything would go up
There are definitely paper/leverage factors at play w/ gold prices, not unlike RE prices. If people had to pay cash for a home, who could even afford a $50k home? or even being required to pay 20-30-40-50% down how what would happen to home prices?
The offset to that for gold is store of wealth, alternative to fiat money if that hits the fan.
how many paper ounces of gold exist vs. real ounces of gold?
One pound of green beans, three summer squashes, two tomatoes, one corn on the cob, a sprig of parsley, 1/2 pound of broccoli, one cucumber, and one apple for desert.
The Japanese are beginning to "get it"
http://www.japantoday.com/category/business/view/abenomics-risk-spurs-go...
Altogether something doesn't seem right. This was no normal sell off.
http://capitalistexploits.at/2013/04/carnage/
Looking for $1200 or thereabouts to get long
fiat paper scams, Ponzi schemes, have a life span and limit.
they end dramatically and suddenly and the perps have no defense
and then quickly confess due to the preponderance of evidence
which suddenly becomes obvious. no?
Commodities get consumed. Only about 20% of mined gold is consumed every year. Gold is money, everything else is credit.
They use subsidies to drive the price of corn well below production cost. Why not gold?
"despite some physical demand response to lower prices"
"In the absence of support from physical buying,"
He clearly has no idea what he's talking about or its more propaganda. There are physical shortages everywhere. The paper price is a fraud. Plain and simple.
The support price for one ounce of gold= one ounce of gold.
ICE just raised crude margins not even PM related, must be trying to break a BIG bank position
looks like there's pretty solid support around $200:
http://www.macrotrends.org/1333/gold-and-silver-prices-100-year-historical-chart
BUY THE DIPS...CRY THE DIPS
If gold was just a commodity?
What if dollars were just a commodity?
I read somewhere that gold has "decoupled" from inflation over the last 20+ years or so. If you look early in time and watch gold move in correlation to inflation and then look at how it has acted over the last 20+ years it seems that people haven't been rushing to it as an inflationary hedge over recent years. Not sure is this is true. You chart geeks can research it.
Let's face it, the CBs and Governments are very powerful (they got the currency, the guns and the prisons). They are very smart short term altho very stupid long term. They can continue all of their schemes and keep the USD going for a lot longer. The USD will still be well thought of and USD and UST will be the destination for flight to safety for a long time. I think the gold stacking and homestead/garden and stored food and water survival strategy is a good one, but premature. Rome didn't fall overnight. It's a slow decay.
No matter how much they print the hundreds of trillions of claims out there on limited real wealth and assets has to all be burned off and that has huge deflationary pressures. The banks are bankrupt and will take a long time for them to truly recapitalize and get all the toxic assets off their books. Velocity will stay low for a long time.
I believe gold will come down to 1,000 and sit in consolidation for quite awhile.
Cash will be king. Don't dis the USD. It's your friend. Make a lot of it, amass it so when the time really comes for its demise you can use it to buy tangible assets.
you should not correlate gold to inflation but instead to real interest rates (nominal rates - inflation)
"If gold was a commodity"?
Remember, gold has no intrinsic value at all, none. Ask yourself this, if the all of the gold disappeared tomorrrow or all of the wheat disappeared, which one would have a greater impact?
That's right, if gold didn't exist no one would care, except those who are long gold. It's a great vehicle to trade, and I've been short it since 1650 and just covered, but it's the same thing as copper, oil, euro etc... whatever, they're all trading vehicles, nothing more.
No one would ever suggest to 'buy and hold' gold forever as a trading/investing strategy LoL - buy and hold does not work with trading vehicles
Remember, gold has no intrinsic value at all, none.
That's what I keep telling people. But no matter how many times I repeat it, they still refuse to give me their gold objects.
And when I gave my wife a bag of wheat instead of a gold necklace for her birthday, she didn't seem at all pleased.
all you are saying is that in principle society can function without money (be it USD EUR or gold).
That is true but
having money makes trade easier (currency function of money) and allows to shift fruits of your labour into the future (preservation of value function of money)
Are we missing the real point - the connection to the Boston Marathon...?
Assume someone knew what was coming later on yesterday when the bulk of runners would reach the goal. Remember September 15th, 2008, the day Lehman collapsed?
Shorting markets would be proven and the best deal on the planet. Shorting gold, silver and oil made it even better! Then one would just relax, sip some champaign and wait until late trading before covering the shorts. Working like Swiss clocks the profits were there already this morning!
Who else besides Al Qaeda & our Banksters with their hopelessly failing derivatives casino would have motive? Today we, UK and France support openly Al Qaeda - is it time to cut this cord?
Boston was well planned and executed with no trace of executors as of yet! It may take time but the ones that did it on ground level are bound to be on a multitude of video tapes... Let's hope they stay alive until we find them - if we ever can find them!
...
LOL, I just noticed that
Is Russian for "Barclays' bitchez".