Gold, lost its Glister?

padington

Loos like the Cyprus gold sale news has smashed the metals through the major support. Could be interesting to see where this ends up.

Hominu

EDIT: Nice edit, it sounded like investment advice then for a moment, I was just going to report it for spam!

Ark_Welder

padington wrote: »

Loos like the Cyprus gold sale news has smashed the metals through the major support. Could be interesting to see where this ends up.

It is what can happen with all forms of speculative investment. The mistake that is sometimes made is to think that any investment is a sure-fire thing.

One of the problems that gold has had over the last decade is the ease with which the person on the street can buy, i.e. ETFs. That does give an easier path to speculation than having to buy physical or futures. Makes it far easier to bale out.

brasso

Ark_Welder wrote: »

It is what can happen with all forms of speculative investment. The mistake that is sometimes made is to think that any investment is a sure-fire thing.

One of the problems that gold has had over the last decade is the ease with which the person on the street can buy, i.e. ETFs. That does give an easier path to speculation than having to buy physical or futures. Makes it far easier to bale out.

Gold is no harder or easier to buy than anything else. And most people who hold some gold do so as a hedge and not as a 'speculative investment'.

Ark_Welder

brasso wrote: »

Gold is no harder or easier to buy than anything else. And most people who hold some gold do so as a hedge and not as a 'speculative investment'.

That might have been true a decade ago, and it might still be true for holders of physical today. But the advent of ETFs has allowed a commodity that was priced only twice daily to be traded with intra-day, fluctuating, demand-driven pricing.

A 5% fall in one day is an indication of both a high level of speculation, and the ease with which it is possible to ditch a holding.

bigoll

http://uk.finance.yahoo.com/news/after-12-years-of-boom-gold-prices-bust-175201756.html

Suddenly cash ISAs don't look so bad.....Perhaps a rocky period ahead for investments though it should even itself out over time.

padington

The gold bug army have got the fear, see the comments at the bottom ...


http://www.tfmetalsreport.com/blog/4637/friday-gold-theatrics

Shaolin_Monkey

I guess the equity market has been pricing in an end to the gold bull run for some time. The Dax Global Gold Mining index is down over 50% since the gold price peaked in Aug 2011. Is the equity market wrong or is it a matter of time before gold slumps further, I wonder?

Line chart = Gold Futures (USD) ; Candles = DaxGlobal Gold Mining Index

merlingrey

Ark_Welder wrote: »

That might have been true a decade ago, and it might still be true for holders of physical today. But the advent of ETFs has allowed a commodity that was priced only twice daily to be traded with intra-day, fluctuating, demand-driven pricing.

A 5% fall in one day is an indication of both a high level of speculation, and the ease with which it is possible to ditch a holding.

But ETF's are often not accountable to the bullion itself (paper trades in the form of IOU's), the gold price quoted in dollars on the comex can theoretically go to $0 due to paper trades.

The physical asset would still exist though.

bowlhead99

Shaolin_Monkey wrote: »

I guess the equity market has been pricing in an end to the gold bull run for some time. The Dax Global Gold Mining index is down over 50% since the gold price peaked in Aug 2011. Is the equity market wrong or is it a matter of time before gold slumps further, I wonder?

Well part of what you're seeing is that the level of company profits and therefore share values is highly geared.

As an example, imagine gold sells for $100 an ounce but it costs average $60/oz to run a company, employ miners, fuel the site, repair and replace the diggers, and meanwhile have someone going off trying to find replacement goldfields for when you run out. The revenue on 10,000 ounces dug up and sold is $1m a year and the costs are $600k a year, annual profits of 400k.

Now imagine gold price falls to $80. The cost of fuel and miners doesn't magically fall to help you out. It still costs $60/oz to dig up 10,000 oz a year. So your results are now revenue $800k, costs $600k, profits $200k.

A company with 50% lower profits this year, next year, year after, and out to infinity is, (simplified) worth half as much .

So you can see that a 20% reduction in gold price has resulted in 50% reduction in the company's value. Broadly this would explain the mining index falling like that. And also why in summer 2012 the mining index was able to rise steeply while the gold chart only went from ~ -15% to ~ -5%.

Clearly there are other factors: appetite to invest in businesses, rather than hold gold as a hedge against your holdings of risky businesses will change over time and so share price indexes and gold price indexes often move in different directions. Share price indexes specifically of gold mining companies are of course well correlated to the price of gold, but there is a 'gearing' effect. To a miner, higher gold sale price = extra money for free ; lower sale price = potentially uneconomic to employ anyone to dig the gold up and you're left without a business.

As an example of a share I hold, Randgold Resources a FTSE listed miner says its average cost of production is $700-750 /oz and will be getting towards a million ounces a year. Oil prices and labour costs obviously feed into this figure so its not constant. But generally a sound business at gold 1500/oz. It is clear however that if the gold price fell by say 60% from here, it would be uneconomic to try and dig up an ounce of the stuff, let alone the million ounces you need to dig to get the cost per ounce down as low as $750.

Every ounce dug would be a net expense. While they spent two thirds of a billion dollars on capital development and equipment last year to support current and future mining. With gold at $500, no way they could keep doing that. So gold at $500 without reductions in oil and labour and capital costs would destroy their business.

So gold falls 50%,70% but company value falls 95%+. Same effect is felt by other miners (obviously they have a variety of breakeven points but principle is the same). When you look at the share index falling 95% and the gold price only falling 50%, do you say "is it a matter of time before gold slumps further, I wonder?" Answer no, actually with everyone stopping production and demand being broadly constant, gold price will reverse...

Is the equity market wrong to value companies lower if they are making lower profits? Answer no. Obviously they have prospects if the gold price is destined to rebound, but if you've put your company into hibernation because it's unable to break even, you won't command a high price in the market.