Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

What the Fundamentals Say about Gold Prices!

Commodities / Gold and Silver 2013 Jul 10, 2013 - 04:21 AM GMT

By: Julian_DW_Phillips

Commodities

We are expanding on the small piece we gave subscribers last week, where we took the gold market over the last two months and adjusted the Demand/Supply numbers in line with the fall in the gold price.

'Bear Raid' with SPDR Gold Sales

After all the fall in the gold price was hard and fast due entirely to the bear raid in the U.S. This started in mid-April after the sales from the SPDR gold ETF had begun more than a month ahead of that. The signal for the bear raid was given when Goldman Sachs issued a recommendation to their clients to go 'short' of gold. The fall was very dramatic and shook the gold world to its roots. The volumes of physical gold that were sold were enormous. Even the Central Bank Gold Agreement limitations on gold sales (when they occurred, pre-2009) were held at 4 - 500 tonnes a year. These sales took place over three months, with the 500 tonne bear raid happening in one week.


  • COMEX warehouse reductions [200 tonnes]
  • Banks plus hedge funds sales [at over 300 tonnes]
  • Plus the heavy sales of gold from the SPDR gold ETF [at over 500 tonnes]

We estimate total U.S. gold sales at over 1,000 tonnes over the last four months. This saw prices fall from the upper $1,600 to $1,200 recently. This gold was bought up primarily by countries east of Greece through to China.

Reaction

It would be extremely naïve of any investor to believe that the current gold prices are now set in stone. As the low prices in the $1,200 region were reached, physical demand was very high, globally, but particularly from Asia. These have petered out as low prices have persisted, but buyers are now in the wings waiting for a 'floor' price to be established first.

But the fall in the gold price changed the entire dynamics of the gold market.

Before we give you these figures we will explain just how we have to distort the numbers to make them fit the impact of falling supply. To this end, we have gone against the obvious impact of lower prices and reduced demand in sectors where we know demand is bound to rise. Here's our thinking behind the squeezing of demand into prospective supply. We do this to highlight how a tremendous price rise is needed to resuscitate newly-mined gold volumes and to distill evaporated recycled gold.

Supply

Newly-mined Gold

The falling gold price is hitting the mining equity sector extremely hard at the moment, but this will reinforce our view that the fall in the gold price is temporary.

The decision by Newcrest Mining Ltd. (NCM), Australia's biggest producer, to write down the value of its mines by as much as A$6 billion ($5.5 billion), will lead to the biggest one-time charge in gold mining history. Rivals such as Barrick Gold Corp. (ABX), the biggest producer, and Newmont Mining Corp. (NEM) are expected to be next.

The unfortunate 'Junior' sector of gold mining is being savaged, with projects cancelled, mines going bust, but those able to survive for the rest of this year falling in price to levels that we believe will be absolute bargains in the months and years to come. Once the reality of the price falls feeds through to supply and demand numbers, we see share prices recovering very strongly. But today's reality was well expressed by Nick Holland, CEO of Gold Fields, in South Africa.

He said, "There's going to be significant rationalizing in the gold industry. You can't keep mines producing if they're losing money. Gold Fields South Deep mine in South Africa is one of the few mines that could survive at the current gold price of 1,230 an ounce. The mine's size [57 million ounces of gold at 3 kilometers and deeper] and the fact that it's largely mechanized, meaning it's less reliant on labor demanding pay rises, will help keep costs low."

But he was definitive when he said that,

"Bullion must rise to $1,500 an ounce for the gold mining industry to be sustainable. The industry is not sustainable at $1,230 an ounce, which is where the gold price is at the moment [now falling through $1,200]. We're going to need at least $1,500 an ounce to sustain this industry in any reasonable form."

To illustrate what we mean, we note that 25% of gold mining companies are 'underwater' at $1,400. We expect this number to rise to over 50% at $1,200? Those who do survive will follow Newcrest and the rest of the large companies and cut their reserves and raise their grades to levels that make the mines profitable at these prices. The implication is that the supply of newly-mined gold could actually halve to 1,400 tonnes per annum? But for the sake of conservatism we only drop supply by 800 tonnes to 2,000 tonnes.

Recycled Gold

The balance of supply comes from sellers of gold, whose sales are evaporating at prices below $1,500. At 1,700 tonnes, scrap sales projected with prices around $1,650, we again underestimate the impact of $1,200 prices and give an optimistic figure of 1,000 tonnes going forward annually. This should leave total annual supply of gold at 2,400 from the projected 4,500 tonnes? But optimistically we hold it at 3,000 tonnes.

What are these? We base our figures on the World Gold Council's estimated figures for 2013 and adjust them in the light of the above events.

Demand

Jewelry: On the demand side, for the sake of this exercise, let's ignore the reality that jewelry demand would soar at these low prices, $1,200 or less per ounce and actually reduce jewelry demand to 1,500 tonnes, down from the projected demand at $1,650 an ounce of 1,900 tonnes. The reality is that we expect several hundred tonnes more jewelry demand at prices of $1,200 an ounce.

Technology: Let's leave the price insensitive Technology demand unchanged at 430 tonnes.

Official sector: Likewise "official sector" demand we leave at slightly lower levels of down from our projected level of 600 tonnes at 500 tonnes.

Total bar & coin: Which has risen strongly this year to date, we reduce (wrongly) to 800 tonnes down from the projected 1300 tonnes.

Gold ETF demand: We reduce to zero down from the projected 425 tonnes.

Thus total demand for the next year unrealistically, pessimistic -allowing for 'over-the-counter stock flows--at 3,050 tonnes. As you can see we have to cut demand unrealistically low to match the likely fall in supply to permit gold prices to stay anywhere near today's levels.

Hopefully, this is very useful to you subscribers because it paints a graphic picture of current gold market fundamentals. We've heard from many expert analysts, whose reputation we respect, but we see them as being very wrong-footed on their views that they see a multi-year bear market for gold. We see them as making a mistake on two areas:

  • Demand/supply numbers will prevent this from happening as it implies a huge shrinkage in both.
  • The price fall has been entirely a U.S. sales phenomenon, which is finite. Either the U.S. will remain out of the market going forward or will have to add to the demand figures we have described above. If they add, then gold price estimates will have to be raised significantly.

As investors, you must ask yourselves: At what price can demand be made to reduce to the levels we portray above and at what price will recycled gold supplies rise to cap the gold price and satisfy demand?

So when Nick Holland says prices of $1,500 are needed to sustain the gold mining industry, we think he is right. Please note that he is referring not just to cash costs per ounce produced, but cash costs, plus exploration costs, plus development costs, plus sufficient profit to distribute to shareholders to keep them investing. Cash costs at $1,200 are not the costs that make gold mining sustainable. $1,500 is far closer to the mark of real costs per ounce.

Consequently, when supplies are likely to drop to a level that even the most pessimistic demand levels are not met, we have to be close to a turn in the gold price. We attach an historic gold price chart going back to the early seventies to show the stark reality of what can happen after gold prices were held at unrealistically low levels (thanks to GoldCore.com).

Hold your gold in such a way that governments and banks can't seize it! Enquire @</strong> admin@StockbridgeMgMt.com

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014