Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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

Catching a Falling Financial Knife