Tags: Gold | Pundits | Ponder | Bottom

Gold Pundits Ponder: Where's the Bottom?

Monday, 01 Jul 2013 08:28 PM

 

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Gold may have further to drop in the rout that erased $66 billion from the value of investor holdings and took prices below the level some mines need to break even.

The metal fell to a 34-month low of $1,180.50 an ounce on Friday. Goldman Sachs Group Inc. says bullion will reach $1,050 by the end of 2014 and Credit Suisse Group AG anticipates $1,150 in about 12 months. Danske Bank A/S, the most accurate gold forecaster tracked by Bloomberg over the past two years, predicts $1,000 in three months. Banks from Morgan Stanley to BNP Paribas SA to UBS AG cut their forecasts last month.

That reflects the biggest quarterly slump in at least nine decades as some investors lost faith in bullion as a store of value. With the total cost of producing an ounce of gold now averaging about $1,200 and billions written off the value of mining assets, some analysts anticipate contracting supply in the next several years that may help halt the retreat.

“In the long term it will provide big support, but in the short term it won’t really make any difference at all,” said Charles Morris, who oversees about $2.2 billion at HSBC Global Asset Management in London, referring to production costs. “I’m still bullish long term, but I just think we’ve got a big nasty bear market in the meantime.”

Annual Decline

Gold fell 26 percent to $1,243.90 in London this year, including a 23 percent drop in the second quarter that was the biggest in data compiled by Bloomberg going back to 1920. The fixing, a twice daily price setting by five banks that is used by some mining companies to sell their output, began in 1919.

Gold is heading for its first annual decline since 2000 after entering a bear market in April, ending a winning streak that saw prices rise as much as sevenfold. It is the third-worst performer, after silver and corn, in the Standard & Poor’s GSCI gauge of 24 commodities, which fell 4.8 percent this year. The MSCI All-Country World Index of equities rose 5.1 percent and a Bank of America Corp. index shows Treasuries lost 2.5 percent.

Investors sold 586.5 metric tons from exchange-traded products in the past six months, more metal than South African mines extract in three years. They still hold 2,045.4 tons valued at $81.8 billion, down from a peak of $147.7 billion in October, data compiled by Bloomberg show.

Hedge funds and other large speculators are the least bullish in six years, with a net-long position of 31,197 futures and options, according to data from the U.S. Commodity Futures Trading Commission. They hold a near-record number of short contracts betting on a decline, adding to those wagers after Federal Reserve Chairman Ben S. Bernanke said June 19 that the central bank may taper the debt buying that helped gold reach a record $1,921.15 in September 2011.

Bearish Bets

The scale of the bearish bets may magnify any rally as speculators close out their wagers by buying back contracts, Macquarie Group Ltd. said in a report July 1. The CFTC data include index fund investments and once that is stripped out speculators probably have a record net-short position, the bank’s analysts said.

The slump is forcing companies to reduce the valuation of mines, having spent $195 billion on mergers and acquisitions during the decade-long boom. Newcrest Mining Ltd. said last month it may write off as much as A$6 billion ($5.5 billion), probably the biggest one-time charge in gold mining history, Ernst & Young LLP said last month.

Barrick Gold Corp., the biggest producer, said Friday it may write down as much as $5.5 billion on the value of its Pascua-Lama project in the Andes and is likely to announce other charges in the second quarter. The combined value of the 30- member Philadelphia Stock Exchange Gold and Silver Index fell by about $142 billion since gold peaked in 2011.

Australian Dollar

Some investors are getting less bearish because prices have dropped so much that mining companies may curb output and put a floor under prices. The total cost of producing an ounce of gold is about $1,180 an ounce, according to UniCredit SpA.

The total cost figure includes items such as depreciated capital expenditures that are relevant over longer time periods, so measuring costs that way implies 44 percent of output is unprofitable at $1,150, Societe Generale SA said in a June 17 report. That’s misleading because companies don’t curb production on short-term price swings, according to the bank. A weaker rand and Australian dollar should help cut expenses, it said.

“There are not many reasons to be bullish on gold,” said Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York. “It can temporarily go below the cost of production if the liquidation continues. It will probably not stay at that low level and will at some point find a balance.”

Global Output

Production cuts will be larger than most investors expect and boost prices, Mark Cutifani, the former head of Anglogold Ashanti Ltd., the third-biggest gold miner, said in an interview June 26. About 13 percent of global output loses money at prices below $1,000, based on cash costs, according to CRU Group, a research company in London.

A contraction in supply may have less effect than for most other commodities because while oil is burned and wheat is eaten, most of the 171,300 tons of gold ever mined is still in circulation. Supply from pits, recycling and sales of central-bank reserves exceeded demand every year since 2006, according to Morgan Stanley.

The slump may be exacerbated by mining companies forward-selling their production to lock in returns, driving prices lower, spurring more sales and creating “a self-reinforcing, accelerated collapse,” Societe Generale said. The 12-year bull market was underpinned by producers buying back hedges that peaked at 117 percent of annual output in 2000.

Future Earnings

Shares of Barrick fell 55 percent in New York this year while those of Newmont Mining Corp., the second-biggest producer, retreated 36 percent. Toronto-based Barrick now trades at 5.4 times future earnings, from as much as 18.9 three years ago, according to data compiled by Bloomberg. Newmont, based in Greenwood Village, Colorado, trades at 12 times anticipated profit, from a peak of 22 in 2010.

Demand from central banks, the biggest gold holders, may weaken because rising U.S. bond yields and a stronger dollar will diminish the metal’s appeal as a way of diversifying their reserves, according to Societe Generale. Central banks added 534.6 tons last year, the most since 1964, data from the World Gold Council in London show.

Sales of coins and jewelry surged around the world after the bear market began, spurring a 13 percent rally in prices in less than three weeks. There are signs that has slowed, with the U.S. Mint selling 19 percent fewer ounces of American Eagle gold coins in June than in May. India, the biggest buyer, imposed curbs on imports last month to rein in its trade deficit and consumers are contending with a record-low rupee against the dollar.

“The fear trade has faded,” Tom Kendall, an analyst at Credit Suisse, said in an interview in New York. “Clearly the global economy still faces some substantial challenges, but the ‘Planet of the Apes’ risk – get gold, guns and hunker down – is diminishing.”

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