Gold price may deliver a few false dawns in 2014

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Gold Bars
Gold Price May Deliver A Few False Dawns In 2014

Analysts warn the gold price may deliver a few false dawns in 2014, and that the general picture is a price pretty much where we find it today: $1,200 to $1,300 per ounce. They also expect more price volatility in the year.

Gold bars
Gold bars

Whilst this doesn?t make easy reading for the investor, it does give some insight into the broader economic picture, especially for South African gold producers. Any company producing gold at much above $1,100/oz may run into a spot of trouble.

Already, Harmony Gold CEO, Graham Briggs, has redoubled his company?s efforts to cut costs by slimming back on equipment purchases and exploration. ?None of our operations, including the capital, will be more than 400,000 rand a kilogram,? Briggs told Bloomberg News.

That?s equal to $1,250/kg and while it includes the cost of development and expansion, it shows that if the gold price contracts any further, there?s very little place for our gold industry to hide.

The advice of Macquarie Research is to stick with gold mining companies with quality assets, a strongly constituted balance sheet, and strong management.

AngloGold Ashanti has tightened its belt considerably and has flexibility in that it expects to produce 600,000 ounces of new, low cost gold from this year which enables it to retire high cost gold elsewhere.

SP Angel, a UK stockbroker favours Randgold Resources. Although a UK listed stock, the attraction of Randgold is the quality of its management team. CEO, Mark Bristow, created the company in the teeth of the last gold bear market so knows what it takes to survive. Randgold builds its own mines and never sacrifices equity to grow relying on cash flow and, occasionally, debt structures.

Johannesburg-listed Sibanye Gold has proven its ability to produce cash in the most difficult of gold prices.

According to Peter Major, an analyst at Cadiz Corporate Solutions, Sibanye Gold?s CEO Neal Froneman, ranks amongst the best of South African gold managers.

What?s also attractive about Sibanye is that it?s dedicated to providing dividend flow before production growth. Cash in a market that is offering flagging revenue but unstinting cost increase, is rare.

The problem with the gold price is that it isn?t primarily driven by normal market conditions. According to CPM Group, some 157,700 tonnes (five million ounces) of gold produced since 1800 is still held in vaults or above-ground stocks.

This is about 40 years of normal consumption which, in 2012, was roughly 2,877 tonnes consisting of jewellery, dentistry, electronics and investment such as official coins and gold bars.

So the recent tick-up in the gold price which has given some gold bulls a moment of hope, seems really to be a knee-jerk response to short-lived economic data, often from the US. In the case of the $28/oz improvement in the gold price in the second week of January, it was the weakest non-farm payrolls report in years that raised expectations the US Federal Reserve may ?hold fire on tapering (continue to buy-back bonds) at its January meeting,? according to a report by Macquarie Research on January 13.

The improvement in the gold price also belied the fact that outflows from exchange traded funds (ETFs) continued, about 12 tonnes out in the first week of January.

It?s worth recording just how drastic the liquidations in the gold-backed EFT market were in 2013: some 28.2 million ounces were sold representing a third of EFT holdings at their peak in December 2012.

The blood-let was somewhat assauged by China?s retail demand for physical gold which mopped up the outflows from investors. Again, there?s caution about whether this demand would at that rate in 2014: ?It would take another significant drop for such buying activity again this year,? said BMO Capital Markets in a recent report.

?Given expectations for synchronised global growth, gold?s role as a safe-haven asset has diminished,? said BMO. It expects the gold price to average $1,250/oz in 2014 which makes Harmony Gold?s efforts pretty much break-even. And not to pick on Harmony Gold, these are levels at which most of the South African gold sector washes its face.

Ole Hanson, head of commodity strategy at Saxo Bank Capital Markets says China?s demand for physical gold is due to dry up following its Lunar year-end celebrations at the end of January. He believes money must start to flow back into ETFs to provide convincing evidence of confidence in gold again.

?In order for the bulls to gain the upper hand, traders need to see that the market is not just being driven by speculative short covering, but also conclude that investor money has begun to flow back into the market,? he says.

Let?s hope the bears at Goldman Sachs aren?t correct. In an interview with CNBC, the bank?s Jeffrey Currie has the recent gold price rally not only running out of legs, but falling in something of an untidy heap.

?Our view there really is driven by the expectation of the US economy reaching escape velocity. Essentially, when you think about a short on gold … it?s essentially just a bet on a substantial recovery in the US economy,? Currie said.

Goldman Sachs has an end-of-year price taret of $1,050/oz equal to a 16% drop from the current price.

In other words, the economic gods are against gold at the current time, according to the experts. Even its foundation, jewellery demand, is limited on the kind of influence it can bring to bear. Whilst the fall in the gold price will lead to more ounces of jewellery demand from Asia, the key question is whether jewellery spend will increase substantially due to the lower gold price, says Jihad Jhaveri, a management investment analyst at Kagiso Asset Management.

?We do not think that this will happen given that many jewellery purchases are made by relatively low income earners who are already spending at their maximum potential,? says Jhaveri.

?Source: miningmx ?

 

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