One possibility I haven't seen floated much:
It seems likely the Fed will start tapering bond buying next year or maybe even this Dec. and most pundits seem to think they will be done purchasing bonds by the end of 2014. At the other extreme are a few gold bugs who think they will never taper. What if they do taper but it drags out much longer than currently anticipated. Given the magnitude of credit contraction we could see much weaker economic growth or even another recession. I wouldn't be surprised to see them still buying bonds going into 2015, albeit at a slower pace. This would likely be positive for gold as Fed balance sheet continues to grow along with dollar supply, while gold production falls as miners retrench.
That break even cost of $1000-$1100 is a recent development. Costs were much lower a few short years ago. Ask yourself why would mining costs go up so much when general inflation is so low (one of the reasons for gold's fall from grace). The extraordinary rise in costs was due to commodity boom and the growth at all cost mantra of mining companies. That is now a thing of the past and costs are coming down. This new trend has just begun and i'm willing to bet the average break even will be under $1000 in 2014.
You must not have read many balance sheets. There are some miners that have heavy debt loads that could be a problem if the price of gold goes still lower and stays there, but many are still conservatively capitalized. Where did you get $1500 threshold from? Care to back that up?
Apart from those that took on excessive debt to expand, the main reason why miners were previously profitable with gold at $750 but struggle at today's price is because costs went up dramatically between 2008 and today, much faster than the general level of inflation. This was because of constraints on markets for mining equipment, parts, labour, etc. caused by a massive surge in mining investment and projects as commodity prices soared. Those costs have and will continue to come down as investment dries up and employees/contractors are laid off. Miners are already negotiating better prices from drilling contractors. The price of tires (a big input cost and one that soared spectacularly in 2011-12) have come down significantly. The World Gold Council recently cut their member fees in half.
None of this will matter much if the price of gold continues to plummet, but if it just stays around where it is now, many miners will be able to earn a decent profit and many look very cheap here.
As far as the argument that gold is intrinsically worthless, I agree. However the same can be said of almost any currency. The fact remains that most useful commodities do not make for good money. The fact that central banks continue to hold gold as reserves and many people around the world think of it as money give it value as a medium of exchange. How much value it has is always debatable but we do know there is less of it in relation to other forms of accepted currency than at any other time in history.
A John Cleese quote from the movie Clockwise - appropriate here I thought..
What's your reason for avoiding miners (as opposed to minors, which should definitely be avoided!)?
It certainly was smart to avoid miners the last 2 years. You seem to suggest that gold will rise eventually after final washout. At that point miners will likely rise much more dramatically in an environment of rising gold price and declining costs (the opposite of what we've seen over the last 2 years.
For the moment POG is pretty much where we started the week, before all the upbeat economic data released. Doesn't seem to be reacting as usual.
I think you have cause and effect backward. Anticipation of taper is leading to rising rates. If anything the fact of rising rates is more likely to cause Fed to think twice about tapering since rising rates likely to kill recovery
I have no idea whether or not this is the bottom for gold, but what I am sure of is that at the bottom there will be a multitude of analysts and pundits calling for still lower prices.
I wonder if the Fed had not adopted the ongoing monthly purchases, but instead continued to periodically inject $100s of billions per QE1 & 2 every 6 months or so, whether a slightly lower injection would still be viewed as "monetary tightening".
Mining CEOs have a pretty poor record of predicting gold prices. Lately its seems everyone is falling over each other to come up with a lower projection. If sellers aren't exhausted yet that point can't be far away.
Not long ago the market was going up with every bit of economic news that came in worse than expectations because it meant that QE would continue. Now the market seems to be rallying on better than expected news. The market seems to be having their cake and eating it too... for now.
Thanks, wasn't aware of that one. However on checking it out I see that the manager has closed the fund this month. Opened in 2011 after years of gold outperforming the S&P, and closed after 2 years of under performing. Just one more contrary indicator.
S&P 500 is up today. GDX and S&P have been nearly perfectly negatively correlated lately.
I think he meant lower price environment than previously enjoyed, which would include today's price. I wouldn't read it as an expectation of lower prices in the future.
It used to be a company had to show it can earn profits on a new line of business. Amazon is in the exalted position of just announcing a new business or service and the stock goes up. Look out when they fail in one line (inevitable).
You may be right, but in my experience trend lines rarely behave that neatly. The miners are lower today than when gold last saw $1,000. The inflation in their costs is not likely a one-way street.