prices below $1,200 an ounce may precipitate a fresh round of
production cuts in the mining sector aimed at re-balancing the market,
strategists told CNBC. Although the short-term view on gold
remains overwhelmingly negative – with nearly three quarters of
respondents in this week's CNBC gold sentiment survey forecasting
further weakness for bullion – many say prices may start stabilizing
below $1,200 – levels where a supply response from the mining sector may
kick in.
"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.
strategists Giovanni Staunovo and Dominic Schnider, "should come with
the gold price decline toward the marginal cost of production."
UBS estimates that 10 percent of supply "on a
cash cost basis would be loss-making at a price between $1,050 and
$1,150/oz. At this level, the gold market should be adequately balanced
and find a new equilibrium," they said.
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.
ETF outflows
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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