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Softening gold price sets off alarm bells

Investors and gold producers alike are becoming nervous as the global price of gold continues to soften in the face of the strengthening US dollar.
Alarm bells ring for producers when gold dips below $US1200 ($NZ1520) an ounce, severely eroding already stretched profit margins, but the prospect of $US1000 an ounce is now being mooted by some analysts.

Gold’s softening price has prompted New Zealand’s largest producer, Oceana Gold, in East Otago, to give notice that unless prices firm, its East Otago and West Coast operations could be facing closure between 2015 and 2017.

In a recent two-day survey of 27 US analysts and traders, half the respondents predicted gold prices would breach a critical support at $US1100 an ounce by the end of this year, Reuters reported.

A significant portion even had $US1000 in their sights, which would be a five-year low and a level considered critical for miners.

Only two of the 27 analysts expected prices to recover above $US1200. From about $US1200 in early December, gold went on to peakpeaked above $US1300 in early March before easing to trade below $US1200 since late October – most recently trading around $US1160 an ounce.

Craigs Investment Partner broker Peter McIntyre said there was ”always a chance” the predictions of a fall to $US1000 could be correct.

He said there were ”three negatives” working against the global price of gold. The lack of inflation in some economies meant gold was less attractive, investors were turning from gold to the strengthening US dollar, and countries in the euro zone were continuing to sell gold stocks in order to repay debt to the European Central Bank.

”$US1200 has been the floor for gold for the last 18 months, but if there’s a break below $US1100, then $US1000 does look very likely,” Mr McIntyre said.

Early last week, investment banking services firm UBS said with gold prices likely to remain weak, it expected mine management teams in Australia to be looking for more cost savings and productivity improvements, Dow Jones reported.

”But, with an already slimmed-down workforce and stockpile strategies enacted at many mines, the next round of cuts and decisions could be a lot harder and potentially have a lasting impact,” analyst Glyn Lawcock said.

UBS expects gold to average $US1200 an ounce during 2015. Prices may remain volatile and prone to rallies on spurts of short-covering, and weak prices have unleashed a flurry of physical demand for coins in Europe and the United States.

But with the dollar on a tear against global currencies and institutional cash being pulled from the market, any recovery may be short-lived.

”The drivers of a sustained rally in gold are ephemeral at best,” said Tai Wong, director, metals trading at BMO Capital Markets in New York.

A strong dollar makes it more expensive for foreign buyers to own dollar-based gold.

Holdings in the world’s No1 gold-backed exchange traded fund, SPDR Gold Trust, which proved popular with investors during the financial crisis that followed the collapse of Lehman Brothers, sank to their lowest in six years on November 7.

The poll highlighted how far gold has fallen out of favour with the end of the Federal Reserve’s years-long bond-buying stimulus programme, worth more than $US3 trillion.

At $US1000, gold would be off almost 50% from the all-time highs of $US1920 an ounce hit in 2011 when investors were piling in to protect against inflation and geopolitical and economic uncertainty.

David Lennox, resources analyst with markets research group Fat Prophets, said gold mines that opened during the global financial crisis would close if the price dropped below $US1100.

”A lot of mines would have to shut – there would be no doubt at that price level,” he said, noting diversified miners would end gold production to focus on their main commodity.

This would reduce the supply of gold and push up prices again as jewellers, rather than speculators, bought the precious metal, he said.

”You’d start to see again that increase in the appetite for gold from its real sources,” Mr Lennox said. He was ”comfortably” forecasting a gold price of $US1200 by the end of 2015, even as a rise in US interest rates put some short-term dents in its value.