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How Low Can Gold Go?

George Kesarios
Apr 19 2013, 16:39

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Before I continue let me bypass all the conspiracy theories about gold (to which I do not subscribe) and let me also put aside the controversial issue of if gold (GLD) and silver (SLV) are money or not. In today's article I will concentrate on just one thing and that is, what might the price of gold be, based on the cost of production. Also, how low can gold possibly go, assuming maximum downside bearish market pressure.

Generally, the price of any mineral or precious metal is a function of the cost to get it out of the ground plus a markup for the nice people doing all the hard work (the mining company). If gold corrects below the cost of production, then miners will not make any money. And when miners don't make money -- because they cannot cover their cost -- they stop mining and production falls. And when production falls to such an extent that demand outstrips supply, then prices will go up again and the miners will once again start production.

So in a sense, the absolute bottom for gold is the level required for miners to bring it out of the ground. If gold were to trade below that level, production would stop. So one question is, what does it cost to get gold out of the ground?

Taking a cue from a recent article written by fellow SA contributor Hebba Investments -- and if his numbers are accurate -- the true cost to produce an ounce of gold (excluding write-downs) was $1287 for 2012. However, he also states that the true cost to mine gold is actually less than $1287. In most cases the true cash cost is under $1000 an ounce for most miners.

On the other hand, the CEO of Barrick in a note to shareholders, said that:

In 2011, the company performed well against this strategy. Barrick met its operating guidance for the ninth consecutive year, producing 7.7 million ounces of gold at total cash costs of $460 per ounce, positioning Barrick as one of the lowest-cost senior gold producers. (emphasis added)

So we are getting some very conflicting numbers here. And while I have no reason to doubt the CEO of Barrick, if Barrick's cash cost of gold production is that low, why has Barrick's stock returned to 1990 levels and the other big miners such as Newmont (NEM), AngloGold (AU), Gold Fields (GFI) and Harmony Gold (HMY) have retreated to 2003 levels?

In any case, for the purpose of this article I will use the data from Hebba Investments. Having said that, I will use the $1000 mark as the absolute minimum gold must trade for, in order for most miners to be in business and for the world to have a steady supply of gold.

The next question is, can gold fall below the cost of production? Absolutely. Gold as well as silver can under certain conditions trade below the cost of production. It happened more than a decade ago. In fact silver was trading below the cost of production for many years and was only produced as a byproduct of other mining activities.

But prices cannot fall below the cost of production for long. It can happen for a few months, but it's not something that can last for a very long time.

So assuming maximum bearish pressure by market forces, I would have to say that the worst case scenario for the price of gold is in the $1000 mark.

But there is another question that needs to be answered. Can the cost of production fall, whereby we will then need to establish an even lower absolute rock bottom baseline for gold -- even below the $1000 mark -- assuming production costs fall?

The answer is also yes. In fact, I think the cost of production will probably fall over the next several years, for the same reason that production costs skyrocketed over the past decade.

When gold prices started rising in 2003 -- after a two decade siesta -- there were no mining engineers to be found. All of a sudden companies were in desperate need for mining engineers, because the old timers were retiring and colleges and universities didn't have mining curriculums, because there was no demand.

The same thing applies to many companies that provided products and services to mining companies. Many companies did not invest in their business because they could barely make any money due to low demand.

Then all of a sudden it caught everyone off guard. There was tremendous need for everything in the mining space and the pent-up demand increased prices for these products and services much more than anyone imagined.

As long as the price of gold was going up, more and more mining companies were forming and getting in on the act to produce gold and more and more products and services were needed.

Now if and when gold prices will retreat (and we have indications of such as of late), then the need for these products and services will be lower and I think the cost of mining will start falling.

Of course for this to happen, we need to see the price of gold falling over the long term. Currently we only have indications that this might happen and we do not yet have an established trend.

Bottom line

Assuming the data from fellow SA contributor Hebba Investments is correct, then the worst-case scenario for the price of spot gold -- assuming maximum bearish market sentiment -- is probably in the $1000 range, for a maximum period of several months.

However, lower gold prices over the long term might also lower the cost of production. If this is confirmed, then the absolute rock bottom price for gold might even be less than the $1000 mark.

I'm in agreement with Daveinjax...chart wise gold is a popped bubble. Will continue to move lower over the long term.That being said, the FED, monetary policy,and ignorance in general all add up to gold being higher. I don't have a crystal ball, but I'm going with the chart until the downtrend is broken/exhausted.

I'm more into actual physicals on hand anyway...lead and powder. Paper gold in an ETF will be worth less than TP if something big happens anyway. Guy has to have it in possession, IMO

Don't worry,when hawkeye said he bought gold at the fire sale a few days back, most knew not to buy.

I feel sorry for the ones who thought he called it.

I'm going to save this post for posterity. We'll all have a good laugh at it a year from now.

PS For the record, "a few days back" was Monday, April 15th, 2013.

Oh,don't you worry. As you know,a good many have already saved some of your posts for posterity sakes.

It should settle the question for those couple of folks who thought you might have been making sense.

A year from today, then. We'll see.

Do You Believe In The 12 Rules Of Goldbuggery?

Seeking Alpha
Apr 21 2013, 01:32

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

An investing mantra many equity investors live by is to "buy on the dip." It appears the same is true in the world of physical gold. As investors in gold futures and ETFs such as GLD and IAU seem to be tripping over themselves to get out of gold, demand for tangible gold is skyrocketing. A Reuters article from Friday morning highlights the rush across Asia to buy physical gold. In the United States, the Mint has already sold 153,000 ounces of gold coins in April, more than the combined totals from February and March. In fact, in the midst of the gold price collapse, on April 17, the United States Mint sold 63,000 ounces of gold. That one day total, by itself, eclipsed the 62,000 ounces of gold sold by the Mint in March.

In terms of silver, retail demand has also been quite remarkable, despite the breathtaking drop in price. If you want to purchase 1 ounce Silver American Eagles from APMEX (American Precious Metals Exchange), you'll have to wait a while or pay a hefty premium. Most of the years for which the 1 ounce Silver American Eagle exists are sold out. And for those years that are not sold out, you will pay premiums in excess of 25%. A 2007 Silver American Eagle, for example, has premiums as high as $8.49 over spot. That is a 36.55% markup based on the current silver price of $23.23. While there are other dealers offering prices a bit lower (the $28 per ounce region), the markups, on a percentage basis, are still quite steep.

I know there are those who get their physical gold exposure through GLD, IAU, or other exchange-traded products. In the world of silver, I know some investors buy SLV or SIVR for physical silver exposure. What the current spike in demand in the face of falling prices tells me is that the group of investors who believe you don't own physical gold and silver until you can hold it in your hand is alive and well. Instead of breaking the spirit of precious metals enthusiasts, the recent price drop seems to be viewed as a buying opportunity. I guess someone forget to send these people a copy of Barry Ritholtz's "The Rules of Goldbuggery."

You may recognize Ritholtz's name from his appearances on CNBC and Bloomberg. If you would like to read a copy of his lengthy curriculum vitae, you can do so here. While I don't consider myself a gold bug, gold is one holding in my diversified portfolio. As a gold owner, I would like to take this opportunity to address Ritholtz's 12 rules of "Goldbuggery" from the perspective of one investor (myself) who is neither obsessed with gold nor full of the hatred toward gold that some seem to possess.

Ritholtz's twelve rules are in italics, followed by my comments:

1. Gold is a currency - In his comments supporting rule number one, Ritholtz says, "[Gold] is a permanent store of value." It appears to me that Ritholtz believes people who own gold view it both as a currency and as a store of value. That is not necessarily true. I, for example, do not own gold because I view it as an easy to use medium of exchange or because I want it to become the world's future medium of exchange. Instead, I view it solely as a store of value.

2. The price of gold cannot fall, it can only be manipulated lower - I recognize that the price of gold can both fall and be manipulated lower. Whether one or the other is happening at any given time is irrelevant to me. The price is what the price is. As I explained in "Gold's Epic Plunge Should Cause Reflection On Why You Own It," I find it important to have an appropriate balance of how much in precious metals I own relative to my entire portfolio. If you truly own gold as a store of value and you manage your liquidity in a way that does not require you to sell it, then the recent plunge in price should have no negative consequences for you. In fact, in the aforementioned article, I noted one positive that results from the recent declines: "My cash flow will improve as my storage costs, which represent a percentage of the total value of my precious metals holdings, will now decline."

3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise - See my comments in number two.

4. The world MUST return to the Gold Standard one day - I own both gold and silver, and I would much rather see a fiat currency system that was managed in a way in which I would feel as if I could own the fiat currency as a store of value rather than owning precious metals as stores of value. Unfortunately, such a system does not yet exist.

5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher - I disagree. If the massive amount of money being printed was actually getting into the hands of the majority of the world's citizens, rather than just into the hands of the financial sector and investors, I would venture to guess that gold's price would be heading much higher from here. Until everyday people start to get their hands on the trillions in fiat currency being electronically printed, then gold will likely fall in and out of favor with institutional investors (who have more influence on the price than do retail investors), as those institutional investors continually change their minds about whether high inflation is a near-term risk.

6. Gold works whether the economy is good or bad - In his comments supporting this rule, Ritholtz had this to say: "When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!" If you come across gold investors who think in that way, they have likely learned the tricks of the trade from equity investors. The die-hard, buy-and-hold-stocks-forever investors, more than any type of investor I have ever come across, are fabulous at playing the "good news is good news" and "bad news is good news" game. When I read Ritholtz's comments for rule number six, it immediately reminded me of the comments we often hear from equity bulls regarding oil prices: If oil prices are declining, it is a tailwind for the consumer and good for stocks. If oil prices are rising, it is indicative of a strong economy and good for stocks. From my point of view, gold is a store of value. Whether the economy is good or bad, I don't care how gold's fiat currency price performs.

7. Gold will survive after the world economy crumbles - In the comments that followed this rule, Ritholtz again poked fun at gold investors. I remain open to the possibility that should the current monetary system collapse, gold will, for some reason, not be convertible into whatever new fiat currency system comes into existence. There are risks to every investment one makes. Regarding that risk to gold, I have carefully considered it and decided the likelihood of that occurring is not enough to cause me to sell my gold.

8. Never admit that Gold is essentially a sucker's bet - To support rule number eight, Ritholtz said, "Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008." His focus on gold's price performance over the decades tells me he does not view gold as a store of value, but rather as a financial asset that must generate a sufficient return in fiat currency terms. Owning something as a store of value has nothing to do with betting.

9. Gold is a rejection of government, and [its] control of fiat money and finance - In my opinion, gold is not a rejection of government and its control of fiat money. Instead, gold is a form of protection against the possibility that those who control the money supply mismanage their important responsibility.

10. All Gold discussions must contain ominous macro forecasts - Ritholtz supports this rule with the following comment: "Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future." In a way, with just a few modifications, his comment reminds me of what some would claim equity analysts do (questionable correlations, unprovable predictions, and an eternally optimistic view of the future). I am a gold owner who prefers to remain neither hopelessly optimistic nor consistently pessimistic. Instead, I strive to be realistic.

11. Gold is always rallying in one currency or another - Who actually believes this?

12. China & India know the value of Gold; the Western world does not - Perhaps that is largely true. Although judging by the recent demand at the U.S. Mint and APMEX, it appears that some people in the West share China's and India's views on gold.

As a result of the recent price declines in gold and silver, they have become a very hot topic in the financial media. If you are someone considering a purchase of precious metals, be careful of the big premiums in silver. Additionally, remain aware that some commentaries (such as Ritholtz's) are seemingly more intent on capturing attention and arousing emotions than on helping you become a better investor.

Additional disclosure: I am long gold and silver

There is a clear disconnect since last Monday between physical gold/silver and the paper stuff hocked by the financial houses. Like I said when all this was going on, there was no shortage of buyers during the price dip. Problem, in fact, was a shortage of physical supply for them to buy. Oh, there was plenty of the paper gold and silver available, but that's because they can print those up at will, which was the cause of the dip to start with, and intentionally so, i.e., it was an engineered dip designed to get the weak-kneed to sell their physical at bargain basement prices to the financial houses. The smart money was buying.

Are youlanning on taking any positions in stocks mentioned AFTER 72 hours?

Are you buying gold at these prices, if I may ask.

Are you expecting a severe stock market downturn any time soon.

Thanks for a great post.

eyeball, I think you are asking me this question, (maybe not.) The article was written by a contributor to Seeking Alpha. Click on the underlined link and you can read his background and intentions.

Ok

Here's my take on some of Ritholtz's rules.

Value is a concept not found in nature apart from humans. There is no definition of value apart from a market, and thus, everything derives its value from the market where it's traded. Gold is just another commodity and not a particularly useful one, which is why Native North Americans had little use for the stuff.

Ritholtz doesn't understand the concept of value and markets, or at least pretends not to understand. Yes, there are ways of manipulating markets, but only on a temporary basis. A large amount of gold being offered for sale is not market manipulation, its supply and as long as that supply exceeds demand the price will fall.

Highly unlikely, but if that came to pass the first step would be to force all private holders to sell their gold to the government at a price the government would set. This has happened in the U.S. and it's an absolute requirement for going back to any commodity standard.

Those who think they will get rich by holding gold in hopes of the world returning to a gold standard are living a pipe dream. Get caught trying to keep and then sell gold after the gold standard is established and you'll be spending long years behind bars as an example to others. If you think we have big government now just wait until you have to get a government permit to keep any gold dental work you have.

Fiat money is not a commodity, it's an idea not subject to the normal rules of supply and demand. Central banks don't print money, at least not that much of it. Most of the money is created without any physical form from thin air just by entering numbers on a computer. What comes from thin air can just as easily go back into thin air. When the time comes Central Bankers will evaporate a lot of the excess money on their books through complex manipulations that would result in prison time for any private party.

Of course this is nonsense from someone who thinks gold is money and a store of value apart from the market. In a good economy investors sell gold because they can make more gains in stocks. In bad economies the price of all commodities falls. The period from 2008 to now is the exception with fear driving up demand for gold, and thus, its price. Fear is a form of market manipulation and it can only work for a while.

Yes, the gold will still exist, but so will any commodity. Assuming there's any kind of market the value of any commodity depends of on supply and demand. Likely food, clothing, fuel, medicine, tools, equipment, guns, ammo, and spare parts will be in much higher demand than gold, which is relatively useless to people in such a scenario. Likely the U.S. will declare emergency powers and impose price controls and rationing just as they did in WW2. With no competition from foreign goods and labor the domestic economy could go from bad to boom in short order. The collapse would have the benefit of ridding us of foreign debt.

These are all part of the market manipulation surrounding gold. In time, as the fear of economic collapse fades the price of gold will fall back to its historic relationship with other commodities such as platinum.

http://www.reuters.com/article/2013/04/17/us-gold-coins-idUSBRE93G15Z20130417

"U.S. gold coin sales surge after historic sell-off."

Is it the sucker rally, or the sharp guys, is the question.

Three points.

1) There is only one gold market. There is not a paper gold market and a physical gold market. If there were two separate gold markets then the price of physical gold wouldn't have dropped to under $1,400 per ounce on April 15th and people wouldn't be buying all these coins.

2) Gold prices are set by supply and demand and being the price of gold is still down around $1,435 this morning, the buying of physical gold this past week has been small compared to the amount that was sold off last Monday.

3) Where gold prices go from here depends on where the stock market goes. Did the 4 month rally end last week, or just pause for profit taking? Anyone who can answer that question can make a lot more money in stocks than in gold.

Patience, my friends--Patience.

Wait, you mean. Wait for what?

Jim Rogers: This is when I'll buy more gold

The Daily Crux
Thursday, April 25, 2013


From Bloomberg:

Jim Rogers, who predicted a commodity rally in 1999, said he may buy gold if a bear market deepens and prices fall to $1,300 an ounce or below.

Bullion for immediate delivery tumbled to $1,321.95 on April 16, the lowest since January 2011, stoking a frenzy among coin and jewelry buyers from the U.S. to India and Australia. Rogers, the chairman of Singapore-based Rogers Holdings, hasn't bought any bullion after the slump, he said in an interview.

"If it goes to $1,300, I hope I am smart enough to buy some," he said in Singapore. "If it goes lower to $1,200, I hope to buy even more. If... that's not a prediction."

Bullion lost 14 percent in 2013 as investors including the University of Texas Investment Management Co., the third-largest U.S. academic endowment, sold the metal after a 12-year rally. Gold coin sales by the U.S. Mint are heading for the highest since December 2009 as buyers took advantage of the worst two- day slump in three decades on New York futures.

"Gold was acting very unusually for the last 12 years and was overdue for a decline," Rogers said in a separate interview on Bloomberg India TV. "Gold will make a proper bottom before resuming the bull market."

Paulson's Bet

Morgan Stanley said this week the peak in the price "has now passed," while Goldman Sachs Group Inc. said April 23 it exited a bet on lower prices while saying bullion may fall even more. The declines in prices are attracting retail investors, while billionaire John Paulson has stuck with his view that the metal will climb as a hedge against inflation.

Spot gold traded 1.2 percent higher at $1,448.44 an ounce at 6:39 p.m. in Singapore. Prices are 7.2 percent below the April 11 close of $1,561.45 an ounce that preceded a 14 percent slump in two sessions through April 15, the worst since 1983.

Demand for gold in India, the biggest consumer, is double the level for this time of year, said Rajesh Mehta, chairman of Bangalore-based Rajesh Exports Ltd (RJEX)., the nation's largest exporter of gold jewelry and a retailer. Nationwide daily sales of jewelry, coins and bars may be about 4 metric tons, compared with normal levels of about 2 tons to 2.5 tons, he said today.

"The rush is reasonably good," said Mehta. "Last week was unprecedented. The frenzy seen last week is not there but volumes are good and almost similar to last week."

India Premium

UBS AG said April 23 that physical-gold flows to India, the world's biggest importer, approached the highest since 2008, while Standard Chartered Plc said shipments last week were 20 percent above a previous record.

The surge in demand is forcing jewelers to pay a premium of as much as $10 an ounce for immediate delivery, compared with $1 an ounce to $1.5 before the price slump, said Mehta. The precious metal may drop to $1,370 within three months if funds continue to exit gold-backed securities, he said.

Holdings in the SPDR Gold Trust (GDTRGOLD), the biggest bullion-backed exchange-traded product, are set for the largest monthly decline since trading began in 2004. Russia and Kazakhstan expanded reserves for a sixth month in March, International Monetary Fund data show.

The strength of the US dollar is surprising people. That has a lot to do with falling gold prices.
That decreases speculation.

China and India are traditionally big investors in the world gold market, and their economies are slowing.

We're now, not even a year later, above the point where I recommended buying last April. I imagine an apology is forthcoming.