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4 Oct 2013
Gold bugs in danger of extinction as investors flee to safety of fiat currency
FXstreet.com (London) - Does anybody remember the “USD5,000/oz?” speculation? Two years ago if you’d drunk a shot every time somebody raised that possibility at a commodities round table, you’d have had to have your stomach pumped before the morning tea and biscuits. But today the outlook is a much more sober one.
In the short-term, gold has continued to struggle to gain any traction despite creeping short term risk-aversion from the US government shutdown.
The yellow metal has fallen 23 percent so far this year, on prospects of tightening or less expansionary monetary policy from G7 central banks.
Although news headlines may not look that different from September 2011, when gold was pushed to record highs above USD1,900/oz, market dynamics and risk appetite are very different. Yes, we have a debt ceiling stand-off in Congress, political fragility in the Eurozone and geopolitical tension in the Middle East. But the willingness of central banks to step in (particularly the ECB) to backstop faltering economies has reassured markets. While using central bank balance sheets to underwrite economic failure will not please monetary purists, it has been supportive for risk.
And although gold was given a temporary boost when the Fed announced last month that it would not be tapering its USD85bn-a-month asset purchase programme, it is now back to pre “notaper” prices. And though the US debt ceiling stand-off now means that a taper will almost certainly be pushed into 2014, a taper is going to happen. The Fed cannot continue to intervene or to artificially suppress rates indefinitely, and at some point something is going to have to give.
Mining viability
Gold is of course not a pure commodity but a de facto currency. Long after the euro is nothing but a barbarous relic, you will still be able to trade in gold. However, gold prices are still affected by production concerns. And it is rapidly approaching the point at which it is not worth extracting from the ground. As Barclay’ Suki Cooper has pointed out, last year the average cost of gold production was USD673/oz, and the marginal cost of production of gold (90% percentile) was USD1,104 percent. Assuming maintaining capex at USD200/oz, the total support cost is around USD1,300/oz. Barclays’ estimates suggest that should prices dip below this marginal cost, as they did earlier this week, 10 percent of the cost curve becomes cash-negative, or approximately 262 tonnes of production.
In the absence of significant bidding at price dips to support prices, this marginal cash cost threshold could have significant implications for gold.
Where is the fear?
And returning from supply fundamentals, gold bull markets need fear. Gold is the ultimate haven currency. And haven currencies need fear to drive price. The difference between USD1,900/oz September 2011 and sub USD1,300/oz September 2013 is that fear. Fear of inflation, Eurozone implosion, US default. None of those are seriously in play. And without them, investors are going to continue to liquidate gold holdings and seek returns in higher yielding markets.
In the short-term, gold has continued to struggle to gain any traction despite creeping short term risk-aversion from the US government shutdown.
The yellow metal has fallen 23 percent so far this year, on prospects of tightening or less expansionary monetary policy from G7 central banks.
Although news headlines may not look that different from September 2011, when gold was pushed to record highs above USD1,900/oz, market dynamics and risk appetite are very different. Yes, we have a debt ceiling stand-off in Congress, political fragility in the Eurozone and geopolitical tension in the Middle East. But the willingness of central banks to step in (particularly the ECB) to backstop faltering economies has reassured markets. While using central bank balance sheets to underwrite economic failure will not please monetary purists, it has been supportive for risk.
And although gold was given a temporary boost when the Fed announced last month that it would not be tapering its USD85bn-a-month asset purchase programme, it is now back to pre “notaper” prices. And though the US debt ceiling stand-off now means that a taper will almost certainly be pushed into 2014, a taper is going to happen. The Fed cannot continue to intervene or to artificially suppress rates indefinitely, and at some point something is going to have to give.
Mining viability
Gold is of course not a pure commodity but a de facto currency. Long after the euro is nothing but a barbarous relic, you will still be able to trade in gold. However, gold prices are still affected by production concerns. And it is rapidly approaching the point at which it is not worth extracting from the ground. As Barclay’ Suki Cooper has pointed out, last year the average cost of gold production was USD673/oz, and the marginal cost of production of gold (90% percentile) was USD1,104 percent. Assuming maintaining capex at USD200/oz, the total support cost is around USD1,300/oz. Barclays’ estimates suggest that should prices dip below this marginal cost, as they did earlier this week, 10 percent of the cost curve becomes cash-negative, or approximately 262 tonnes of production.
In the absence of significant bidding at price dips to support prices, this marginal cash cost threshold could have significant implications for gold.
Where is the fear?
And returning from supply fundamentals, gold bull markets need fear. Gold is the ultimate haven currency. And haven currencies need fear to drive price. The difference between USD1,900/oz September 2011 and sub USD1,300/oz September 2013 is that fear. Fear of inflation, Eurozone implosion, US default. None of those are seriously in play. And without them, investors are going to continue to liquidate gold holdings and seek returns in higher yielding markets.