Gold bars and granules are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna
(Reuters) – The price of gold, down more than a third in three years, is approaching the tipping point where the mining industry would see a spike in the number of producers reducing output or even shutting down operations.

Several mines globally have already suspended output in the past 18 months, but not as many as industry watchers expected as producers focused on slashing costs and reworking mine plans to extract more profitable, higher-grade ounces.

But with bullion’s slide this week to a nine-month low of $1,208.36 an ounce, those defenses may not be enough.

“$1,200 is a critical level. The industry has geared itself around $1,200,” said Joseph Foster, portfolio manager at institutional investor Van Eck Global. “If it falls below that level, then there are a lot of mines around the world that are really going to struggle.”

Van Eck is a major investor in Barrick Gold Corp and Goldcorp Inc and a top shareholder in most other large gold producers.

Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump 67 percent since September 2011.

And cuts and closures could be swifter and deeper than in the last gold bear market as most miners this time around have not offset the risk of potential losses by hedging – the practice of selling gold forward at a fixed price.

At the end of June, only a tiny fraction of production – around 129 tonnes – was hedged compared with the last bear gold market in the 1990s when hedging peaked at around 3,000 tonnes. The practice fell out of favor when hedged producers were unable to capitalize on rising gold prices between 2000 and 2012.

“TERRIBLE, HORRIBLE PRICE”

In response to weaker bullion, gold miners are estimated to have slashed their all-in cost of producing an ounce of gold to an estimated $1,350 in the first half of 2014, according to data from Thomson Reuters’ GFMS metals research team. That was down from $1,696 an ounce for full-year 2013.

Even so, Citibank estimated last month that 40 percent of the gold industry was burning cash at an all-in cost of $1,331 an ounce. But that was at a gold price of $1,290 an ounce. Bullion was last trading at $1,217 an ounce on Wednesday.

“How many guys are going to get up and say this is a terrible, horrible price and we can’t survive at this price? Because we can’t,” Doug Pollitt of Pollitt & Co, a Toronto-based brokerage firm, said at the annual Denver Gold Forum last week.

Industry participants were loathe to single out specific operations that could cut or shut down production but high-cost mines are at greater risk.

For example, Iamgold Corp and AngloGold Ashanti Ltd’s Yatela mine in Mali had all-in sustaining costs (AISC) of $1,910 an ounce in the quarter to end-June. The operation halted active mining in 2013 due to high costs and weak gold prices but continues to process stockpiled ore.

“This year, as the gold price continues to remain below $1,300 per ounce, we are considering bringing an end to the movement of ore onto the stockpiles and to just continue to leach the ore already on the pad until 2016,” Iamgold spokesman Bob Tait said in an email.

Other high-cost producers include St Barbara Ltd’s Simberi gold mine in Papua New Guinea, which reported AISC of A$2,300 ($2,039) an ounce in the June quarter. An engineering program is underway at Simberi to improve plant performance.

Iamgold’s Rosebel mine in Suriname had AISC of $1,216 an ounce in the three months to end-June.

SUPPORT FOR GOLD PRICES

To be sure, some in an industry known for its optimism see a proverbial silver lining: they believe that a sharp drop in production will help to lift prices.

While gold is also a financial asset that can benefit from uncertainty and inflation fears, some investors and executives say less supply cannot help but put a floor under bullion.

Miners will remain loathe to invest in new projects at gold prices below $1,500, said Douglas Groh, a portfolio manager at Tocqueville Asset Management.

“Two years from now end-2016, 2017 and even into 2018, the markets will recognize that there isn’t new capacity coming on stream … Certainly the gold price will jump,” Groh said.

For Goldcorp CEO Chuck Jeannes, the industry is close to “peak gold,” an expression that means production is at its all-time high as deposits get harder to find as existing production gets mined out.

“I don’t think that we will ever mine as much gold as we do in 2015. That’s positive for the gold price,” he said in an interview.

(1 US dollar = 1.1282 Australian dollar)

We’ve all heard about the overheated real estate market in China. Well, it’s finally starting to cool down.

Housing data through the summer months reveals that “house prices fell in 61 of China’s largest 70 cities in July relative to June,” according to a Wells Fargo Securities research note. And, that retreat if coming from a high peak. “By our estimates, house prices in China’s four top-tier cities have risen about 60 percent on balance since 2005. Clearly there is room for them to fall further,” Wells Fargo said.

While no major alarms bells have gone off yet, but the developing real estate situation deserves some attention. Looking into 2015, James Pressler, vice president at The Northern Trust Company estimates there is a 30% chance of “something really bad happening in China where they have to implement a dramatic policy shift.”

“We will be watching property developments in China closely. The Case-Shiller index of U.S. house prices peaked in July 2006, a year before credit markets in the United States started to freeze and more than two years before the financial collapse of autumn 2008. Just because China has not experienced a financial crisis to date due to falling property prices does not necessarily mean that it won’t at some point over the next year or two,” Wells Fargo economists added.

For 2014, gross domestic product (GDP) forecasts are around 7.5-7.3% for China. Though, some economists warn the final number could come in even lower. Looking into 2015, a few investment houses are pegging China growth a tad under the 7% mark.

How does this relate to gold? Think back to the fall of 2008. The S&P 500 was collapsing. Gold rallied. During times of paper market collapse, investors shift into hard assets. Gold is a traditional safe haven for Western investors. But, for Eastern investors, gold is much more.

In the East, gold has cultural significance and esteem as a vehicle to store and preserve wealth and is an age-old tradition. Chinese physical demand for gold stems from a different place than most Westerner’s desire to hold gold. Eastern physical demand stems from deep-seated cultural affinity for holding the yellow metal. It is tradition; it is a sign of having made it to the middle class. It is a way to save for a dowry. Jewelry is a way to display a family’s wealth.

If defaults were to arise or worse case—a bank were to fail—Chinese consumers may be inspired to pick up the pace of their traditionally high level of physical gold purchases. There’s nothing like a panic to remind investors about the safe-haven properties of physical gold.

Kira Brecht is managing editor at TraderPlanet.

In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,218.07 up $2.37 per ounce (0.19%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 2.74%. The U.S. Trade-Weighted Dollar Index rose 1.04% for the week.

Gold Market Strengths

Central banks remain attracted to gold. Russia announced that its central bank has added another 9.3 tonnes of gold to its reserves. Russia has almost doubled its gold reserves since the financial crisis, being a net buyer every month since. Furthermore, European central banks have retained much more gold than they expected, unloading just 1.7 percent of the gold allowed in their agreement to limit sales.

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central bank buying russia 2005 2014 investing

Gold mint sales are on the rise. This week, the United Kingdom’s Royal Mint launched an online bullion trading website for the first time. The move is aimed at accessing unsatisfied gold demand in the UK. The Mint’s gold coin sales have increased after being granted value-added-tax-free status in the UK. In the United States, gold coin sales are on the rise as well. Thus far in September, sales of American Eagle bullion gold coins have increased 84 percent from August.

Roughly 50 tonnes of gold have been smuggled into India over the past ten days according to the Hindustan Times. The substantial inflows into the country stem from the seasonal demand for gold and highlight the resilient demand for the precious metal in India. Premiums for gold in India are anticipated to double to $20 per ounce over the London cash price going into October.

Gold Market Weaknesses

The ETF that tracks the Market Vectors Junior Gold Miners Index, the GDXJ, is reportedly too large to match the benchmark. Most of the fund’s holdings have exceeded 10 percent of the outstanding shares, causing the need for the ETF to rebalance to an asset mix that departs from its benchmark.

Down 12% this quarter, commodities are poised for the biggest decline since the financial crisis. Weak global growth data from Europe and China as well as a strong dollar have created severe headwinds for the asset class.

Gold Market Opportunities

The World Gold Council says that gold will rebound by the end of 2014. The confidence in gold expressed by the council is due to the strong demand from India during the current wedding season. The council is forecasting demand figures in the range of 850 to 950 tonnes.

A recent report issued by McKinsey and Company argued that the diamond industry will likely continue to be a strong and profitable one. In the near future, demand growth will outstrip supply.

Gold Market Threats

According to Goldman Sachs Group’s Jeffrey Currie, gold is set to continue its decline. He argues that gold has been supported recently by geopolitical tensions in Ukraine, which are now fading. Investors are also shying away from gold as the dollar continues to appreciate and commodities as a whole suffer. Despite gold being unable to find many buyers during its recent slump, Mohamed El-Erian, Chief Economic Adviser at Allianz, noted today in an editorial that “only brave investors would omit it from their investment portfolio given the fluid world we live in.”

The Central Bank of Japan (BOJ) has reportedly purchased a record amount of Japanese equities. Holding 1.5 percent of the entire Japanese equity market, the BOJ’s aggressive purchasing leads one to speculate as to whether or not the U.S. Federal Reserve is doing the same. Since higher equity prices would directly enhance the wealth effect, thus raising consumer confidence, it is not beyond reason to consider.

Norilsk Nickel is looking at buying palladium from the Russian Central Bank. Uncertainty surrounding the deal, which is expected to amount to 2.4 million oz., may push palladium prices lower. Furthermore, whereas it was uncertain to what degree the Russian Central bank was holding palladium, this deal now reveals that the bank holds a substantial position in the metal.

Gold prices erased early losses and finished the U.S. day session firmer and near their daily highs Thursday. The yellow metal was lifted on short covering and bargain hunting after hitting a nine-month low in overnight trading. The U.S. dollar index backed well down from its daily high and the U.S. stock indexes sold off sharply, which further encouraged the gold market bulls to step up and do some buying. December Comex gold was last up $2.50 at $1,222.00 an ounce. Spot gold was last quoted up $4.80 at $1,222.00. December Comex silver last traded down $0.222 at $17.48 an ounce.

A feature in the market place this week has been the surging U.S. dollar versus most of the other major world currencies. The U.S. dollar index hit a four-year high Thursday, while the Euro currency dropped to a 14-month low against the greenback. The dollar has been lifted by recent U.S. economic data that has been mostly upbeat, combined with some downbeat economic data coming out of the European Union, Japan and other major industrialized countries. The U.S. dollar could continue to trend higher in the coming weeks, or longer, as it appears the monetary policies of the U.S. Federal Reserve and the other major world central banks will continue on divergent paths. The U.S. Fed is reeling in its very easy money policies of the past few years, while the European Central Bank continues to provide monetary stimulus to the flagging European Union collective economy.

The appreciating value of the dollar on the world foreign exchange markets has been a significantly bearish development for many raw commodities, which are priced in U.S. dollars on the world markets. Gold is at a nine-month low, while silver prices this week hit a four-year low. Grain markets are in the tank and crude oil prices are also in a downtrend. Keep in mind that most raw commodity prices are very cyclical. Savvy traders realize this and are presently looking for value-buying opportunities in the present “valley” of the raw commodity cycle—knowing there will be another surge to a “peak” in the cycle in the coming months or few years.

The London P.M. gold fix was $1,213.75 versus the previous London A.M. fixing of $1,210.50.

Technically, December gold futures prices closed nearer the session high Thursday. Gold bears still have the firm overall near-term technical advantage as a 2.5-month-old downtrend is in place on the daily bar chart. The gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at this week’s high of $1,237.00. Bears’ next near-term downside breakout price objective is closing prices below solid technical support at $1,200.00. First resistance is seen at Thursday’s high of $1,224.80 and then at $1,230.00. First support is seen at of $1,214.70 and then at today’s low of $1,206.60. Wyckoff’s Market Rating: 1.5

December silver futures closed near mid-range and hit a contract and four-year low Thursday. A 2.5-month-old downtrend is in place on the daily bar chart. The bears have the solid overall near-term technical advantage. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at $18.50 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at $17.00. First resistance is seen at Thursday’s high of $17.69 and then at this week’s high of $17.99. Next support is seen at Thursday’s contract low of $17.27 and then at of $17.00. Wyckoff’s Market Rating: 1.0.

December N.Y. copper closed down 200 points at 303.40 cents Thursday. Prices closed nearer the session low and hit a 13-week low. Copper bears have the overall near-term technical advantage. Copper bulls’ next upside breakout objective is pushing and closing prices above solid technical resistance at 312.50 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at the June low of 300.95 cents. First resistance is seen at Thursday’s high of 306.35 cents and then at this week’s high of 308.60 cents. First support is seen at Thursday’s low of 301.95 cents and then at 300.95 cents. Wyckoff’s Market Rating: 3.0.

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Some traders and analysts are wondering if the gold/silver ratio got out of whack after silver was beat up worse than gold during a recent downdraft in the two precious metals.

If so, there might be potential for silver to now outperform or at least hold up better than the yellow metal going forward. Traders who share this view could try to exploit this in a ratio trade, they say.

Others, however, look for silver to keep underperforming as long as the precious metals complex remains in a downtrend.

The gold/silver ratio measures how many ounces of silver it takes to buy an ounce of gold. As the ratio falls, it means silver is outperforming gold, and vice-versa.

Both metals hit longtime lows early Thursday in a continuing response to recent U.S. dollar strength, in turn tied to expectations the Federal Reserve will hike interest rates next year while the European Central Bank and Bank of Japan are continuing to loosen monetary policy. But whereas the Comex December gold low of $1,206.60 an ounce was the weakest level in nearly nine months on a futures continuation chart, the December silver low of $17.27 was a four-year low.

By shortly after 11 a.m. EDT, both metals bounced from their weakest levels – gold to $1,221.30 and silver to $17.535. This meant a gold/silver ratio of 69.6 to 1.

This was up from 66 as of the end of August. BMO Capital Markets pointed out that the ratio is above the 10-year average of 57.

At one time, there was an effort to establish a contract for trading the ratio on the Comex division of the New York Mercantile Exchange, said veteran precious-metals strategist George Gero of RBC Capital Markets Global Futures. But while the product never materialized, some traders and funds still do this on their own, buying one metal while simultaneously selling the other. A trader who wanted to take a position to profit from a falling gold/silver ratio would sell gold while at the same time buying silver.

Peter Hug, global trading director with Kitco Metals, said silver may have become “grossly oversold” and that he favors a short gold/long silver trade with an initial target in the ratio of 66 to 1. Gold potentially could drop further, Hug said.

“Obviously, that will drag down silver and platinum with it, but I do not believe to the same extent,” he said. With the European Central Bank recently announcing plans for quantitative easing and Chinese authorities adding more stimulus, Hug said the global economy may not be stellar but yet improve enough to mean increased industrial demand. More than half of silver consumption is for industrial use, whereas this only accounts for a small percentage of overall gold demand.

“From an industrial perspective, and even from an investment perspective, silver at these prices I think will garner more demand than gold and tighten this ratio up,” Hug said.

Deutsche Bank also looks for silver to start faring better relative to gold, although the bank also anticipates further weakness in both.

“However, the relative underperformance of silver may be set for a revival given the recent strength of U.S. growth indicators,” said a recent report from the bank. “Indeed following the gains in the U.S. ISM (Institute for Supply Management) index, it would imply that not only has the S&P 500 further room to rise, but, that the decline in the gold to silver ratio may have moved into overextended territory.”

The ISM’s August manufacturing Purchasing Managers Index rose to 59 from 57.1 in July. Historically, Deutsche Bank said, when the ISM index is above 50 and rising, this has tended to coincide with silver outperforming gold.

The bank also said “we expect that the steady rise in the gold to silver price ratio over the past few years is drawing to a close and that short gold versus long silver is becoming increasingly attractive given the upside to U.S. growth indicators and the S&P 500.”

Gero also looks for silver to fare better relative to gold, with the ratio eventually moving back into the 50s.

“I think as time goes by and you see a (economic) recovery in Europe and a recovery in China, and with a recovery attempt here, next year could be a different story for silver,” Gero said. This would presumably mean more industrial demand for silver, he continued.

“As long as gold maintains its present value, silver will catch up to gold,” Gero said.

It is tricky taking out a short gold/long silver spread trade since the price per ounce for the two is so far apart. In other words, it’s not a simply as selling an ounce of gold and buying an ounce of silver.

Hug favored trading the two metals in equal dollar terms as much as possible using combinations of the full-sized Comex contracts for both metals plus some of the smaller-sized contracts, ideally for the same contract month. For instance, based on where the metals were trading as of when he spoke after Wednesday’s Comex pit close, a comparable – but not precise – spread trade might be going short in one full-sized 100-ounce gold contract while going long in one full-sized 5,000-ounce silver contract plus two mini 1,000-ounce contracts. This would slightly “overcompensate” on the silver side, he added.

With such a trade, Hug explained, market participants would profit whether the two metals rose or declined. They would simply need silver to either fall by a smaller percentage than gold or else rise more than gold.

Others Look For Silver To Keep Underperforming Gold

Some observers noted that silver historically tends to both fall and rise faster than gold in a market that is thinner and thus naturally more volatile. As a result, silver could keep sliding even more than gold, assuming the downtrend of recent weeks continues, they said.

“If prices continue to fall, silver would lose more than gold, therefore the spread would widen a little bit,” said Sean Lusk, director of commercial hedging with Walsh Trading.

Bill O’Neill, one of the principals with LOGIC Advisers, suggested silver would outperform gold in a bull market.

“Silver is a real speculative animal….The specs tend to get ahold of it, and once they do, they tend to move it faster in both directions,” he said. But, he later added, “Let’s say gold goes down to $1,150…silver on a percentage basis could weaken even more.”

As an aside, O’Neill pointed out that the silver price is underperforming gold even though demand for silver from small investors is holding up better, as reflected by U.S. Mint coin sales and exchange-traded-fund holdings. “That shows you the big players are still hammering silver,” he said.

Citi Research has trimmed its price forecasts for most precious metals, describing itself as most upbeat on palladium. Gold is expected to be under pressure in the fourth quarter, but by 2016, Citi sees the average price rising again.

“We downgrade our near-to medium-term gold price assumptions, marking-to-market the current spot environment,” Citi said in one of several research reports on the metals released Thursday.

The 2014 average forecast was revised to $1,275 an ounce from $1,300 previously, while the 2015 forecast was trimmed to $1,225 from $1,365. The 2016 forecast is now listed at $1,300, compared to $1,380 previously.

The bank looks for gold to come under pressure in the final three months of 2014 on continued U.S. dollar strength ahead of expected rate rises in 2015.

“Gold prices have now been in a clear downtrend since the second week of August,” Citi said. “The growing expectation of 2015 U.S. interest rate increases has reduced investor interest in holding gold, while its risk-related source of support has been diminished as the vestiges of geopolitical support that had pushed prices to $1,345/oz. in mid-July have been slowly pared back. Ukraine and Russia agreed to an outline peace deal on Sept. 3rd, while a ratcheting up of the U.S./European air campaign against Islamic State in Iraq and now Syria appears to have contained the regional threat for the time being.”

A negative rolling one-year correlation between gold prices and the U.S. dollar has re-emerged since the second quarter, the bank said. Global holdings of gold by exchange-traded funds of 1,695 metric tons have fallen to the lowest level since the fourth quarter of 2009, nevertheless the year-to-date outflow of 68 tons so far “has been modest” compared to the 2013 pullback of 869 tons, Citi said.

Citi trimmed its 2014 silver forecast to $19.60 from $20.30 previously and cut its 2015 forecast to $18.70 from $21.20. Like gold, the bank looks for silver to rise again in 2016, listing a forecast of $20, although this is down from its prior outlook of $22.

Meanwhile, Citi said a bullish thesis is still intact for palladium, calling for an annual supply deficit of 1.2 million to 2.95 million ounces likely from 2014 onward. Along with supply disruptions in South Africa, the bank cited continued growth for demand due to rising light-vehicle production in gasoline-powered markets, especially the U.S. and China.

“The sheer size of these two markets combined — 40% of global vehicle production — implies
significant potential uplift in demand for palladium, even in a muted growth environment,” Citi said.

The bank revised its 2014 palladium price forecast to $824 an ounce from $835 previously. It left the forecasts alone for the two years – $925 in 2015 and $935 in 2016.