"Gold production may fall at prices below $1,200 as it becomes uneconomical for many mines to operate profitably," said Mark O'Byrne, Founder and Executive Director of Dublin-based bullion dealer GoldCore.
An estimated 36 percent of the South African gold industry is loss-making even at today's spot prices, O'Byrne said, adding that 28 percent of the country's gold miners failed to turn a profit in the third-quarter, based on a gold price of $1,330.
Curbs on mine supply, according to UBS strategists Giovanni Staunovo and Dominic Schnider, "should come with the gold price decline toward the marginal cost of production."
Edmund Moy, Chief Strategist at Morgan Gold and a former director of the U.S. Mint, said major gold miners such as Toronto-based Barrick Gold are already starting to scale back production.
The world's largest producer by sales, Barrick sold three Australian mines this year and Chief Executive Officer Jamie Sokalsky said the company is in talks to sell more assets.
"Many miners have been reducing their capacity like Barrick," Moy said but warned that "if demand for physical gold picks up in the U.S., it will take miners quite a while to re-open their shuttered mines and produce gold."
CNBC's latest survey of market sentiment showed 74 percent of respondents (20 out of 27) expect prices to fall this week, 15 percent (4 out of 27) say prices will trade around current levels while 11 percent (3 out of 27) say prices will rise. Spot gold staged a modest recovery on Monday, climbing 0.5 percent to just under $1,250 after falling earlier to $1,227.34, its lowest level since July 8 after Iran and major western powers struck an initial agreement on Sunday aimed at limiting Tehran's nuclear program in return for sanctions relief. Gold slipped on the perception that the deal lessens the risk of tensions in the Middle East, reducing gold's appeal as a safe-haven.
Bullion has fallen about 25 percent so far this year, reflecting concerns that the U.S. Federal Reserve will start winding down its stimulus program as the economy improves. Accommodative monetary policy tends to cheapen the U.S. dollar, making gold more affordable for buyers paying in other currencies.
"With Fed tapering imminent – and likely to be pulled forward to December if anything – the path of least resistance remains lower and honestly I'm surprised we're not sitting at $1,200 already," said Tom Essaye, a former NYSE floor trader, now President of Florida-based Kinsale Trading LLC, publisher of The 7:00's Report. "The next major catalyst in gold is inflation, but we're still months or quarters from that appearing in the stats."
Investors continue to liquidate holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund (ETF) and a key measure of investor sentiment, as gold grinds lower.
Holdings fell 4.50 tons to 852.21 tons last Friday, the sharpest drop since Nov. 1 and stood at their lowest since February 2009.
UBS expects more selling. "Once the schedule of the upcoming Fed taper becomes clear – we expect this to start in March 2014 – ETF outflows should intensify." The Swiss bank expects fund outflows of more than 300 tons over the next 12 months.
While futures and options flows combined with Asian demand have been strong enough to offset "modest" ETF outflows in recent months, "we advise investors not to count on these factors once ETF outflows intensifies," UBS said.
A stronger U.S. stock market performance – reflecting a propensity amongst investors to take on more risk – has also undermined the case for gold and the correlation will likely remain a drag on prices, survey respondents said.
Dow industrials eked out a slim gain on Monday to end at another record high, after the Nasdaq topped 4,000 for the first time in 13 years and then slipped to close below that level, Reuters reported. The S&P 500 is up 26.4 percent for the year and the Dow has risen seven weeks in a row.
"Gold continues to be an innocent victim of the frenzy on Wall Street," said Jeff Nichols, managing director at American Precious Metals Advisors. Gold's appeal may return, however, once investors realize that "super-stimulative" monetary policies pursued by major central banks are creating over-priced stock valuations out of kilter with fundamentals.
"Sooner or later, when the bubble bursts, equity investors will really lose their heads and gold stands to benefit, if not at first, certainly as the dust settles on Wall Street," he said.
Scott Carter, the chief executive officer of Los Angeles-based Lear Capital and a long-term gold bull, questioned whether the "wild gains" in the stock market – exemplified by the Dow over 16,000 – are sustainable.
"Let's pause for a moment and think about how outrageous that really is," Carter said. "We are living in a simulated reality. Investors are acquiring and holding gold because they know that the market bubble will burst."
Carter added: "Gold remains a hedge, a protection strategy, a diversification tool, and a long-term savings shelter. It has historically always done its job."
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