Deutsche Bank: Gold Market Is Going Through 'Structural Change'
By Kitco News
Thursday April 18, 2013 9:20 AM
(Kitco News) - The drop in gold prices in recent trading days was a “once in a generation” move and the commodity might be going through a structural change as factors that supported gold are changing, said a German bank on Thursday.
“We believe we are witnessing a structural change in the gold market such that many of the forces that had powered gold higher over the past decade are fading and in some instances moving into reverse,” said Deutsche Bank.
The bank said it now sees the long-term fair value for gold at $1,300 per ounce, which is just under the current spot price. The bank said they use several ways to arrive at their fair value estimate, including a look at the marginal cost of production or incentive pricing techniques for miners, and gold’s value versus other commodities on a more historical basis, rather than the premium gold has enjoyed since the financial crisis. Based on this, the bank said it sees gold’s trading range between $1,050 and $1,500.
Gold prices have risen annually for the past 12 years, but 2013 might be the first year of negative annual returns since 2000, they noted.
Since 2001, gold prices found support from several factors, including a collapse in real interest rates, rising U.S. equity risk premium, a weaker U.S. dollar, de-hedging by gold producing companies, coordination by the European central banks when selling gold and higher geopolitical risk versus the 1990s, they said. The creation of physically backed gold exchange-traded funds enabled easier investment, they added.
Now, though, many of the reasons why gold rose are beginning to change, the bank said. “In retrospect, we believe the first sign of a more hostile environment for gold began to emerge from July 2011,” they said, noting this was the low for the U.S. dollar trade-weighted index.
Deutsche Bank said the U.S. dollar is in a new long-term uptrend, whic
At this level you have to focus on the balance sheet strength,low all in costs and the ability of the company to high grade operations. However,I agree a large quantity of companies are going to end up underfunded in their expansion plans and are likely dilution sinks unless prices recover.
As for smaller mining companies with my parameters are NSU and CALVD. Both also pay dividends but the catch is they operate in risky jurisdictions. I also like CROCF as a spec especially if prices hold or rise from these levels because they were able to purchase 162 K oz of annual production for only 7million when they closed their hedge.
Some companies still have options. They can, for example, close high-cost operations and continue operating low-cost mines. It is simple enough.
Some other companies can change mining sequencing to exploit higher grade ore only thus decreasing unit costs. During last conference call some analyst(s) tried to get CGR management to answer if it is possible to do it for Seabee and how long this transformation could take. If I remember correctly (read too many transcripts since reading CGR’s) CEO said that it’s quick and easy (everything is easy for this guy), but operating chief was less optimistic and said something about couple quarters ( I apologize in advance if my memory doesn’t serve me right; read conference call transcript to verify).
If you’re looking for low cost miners with healthy balance sheet then, besides GG, check AGI (real low cost) and PAAS (can be low-cost if closes high-cost operations). Please note that I look to buy GG and PAAS (in case my wife doesn’t discover present results with similar investments :) and already bought AGI.
Yes, miners can do much to reduce costs. With falling prices, their labor force will be less greedy as well. Miners ridding themselves of so many contractors and instituting hiring freezes will put a cold grip on the wage inflation the miners have experienced in the last 4-5 yrs, since many of these guys have been perennial job-hoppers, bouncing from mine to mine, each one paying more than the last. Well those bidding wars (for employees) are going to end pretty fast now. I think even CGR has lots of wiggle room on their cost structure, if they put their thinking caps on. But they need to increase milling capacity, since they have the ability to get more ore to surface now that the shaft extension is operable. A $10mm investment for them can add as much as 500 tpd increase and increase annual gold output by 40-50%, without adding much in the way of variable mining costs. That takes them from floundering and begging for financing, to a self-sufficient, cash flowing enterprise. I don't understand why these clowns didn't do this several years ago. Instead they pizzed it all away on worthless, non-producing exploration costs for developments they clearly cannot afford to convert to a mine(s).
Neil is the worst, self-promoting, big-dreaming CEO I think I've ever seen.
He needs to go, and the Board should fire him based on the stock price destruction alone.
Worthless mgmt in a tough operating environment usually spells doom. That's why my opinion did a 180 on this one in the past 4-5 months. I started to see thru the spin, and the unfufilled promises from mgmt hit the tipping point.