As 2013 comes to a close, gold investors – not surprisingly perhaps – are asking themselves what’s in store for the coming year. Every gold bull on the planet got it wrong this year and with all the bearish sentiment in today’s marketplace, could everyone be underestimating the upside potential for gold in 2014? The answer is probably yes although limited downside action in the gold market still can’t be ruled out.
In my opinion, however, any further downside pressure will be short lived and gold will resume its climb to $1300 and perhaps higher in the next few months. Beaten down gold stocks might well lead the gold price higher given the massive sell-off that has taken place in this much maligned investment sector.
At current prices, many gold producers are under water in terms of production costs and because of this some much needed discipline has returned to this market segment. Companies are reducing debt, stream lining operations, reducing corporate and mine operating staff, cancelling risky high cost projects and selling off assets.
What this all adds up to is the fact that mining companies will be lean and mean when the gold price does recover and that is certain to be reflected in their share prices. One of the great anomalies in the recent gold bull market is the fact that production costs rose almost in tandem with gold prices – in effect offsetting the net benefit of higher prices to producers and their shareholders. The rate of increase in production costs was simply unsustainable and for many companies reflected the trend to mining lower grade gold deposits in order to maintain production levels.
Imagine a major gold company depleting its resource base by eight million ounces per year and having to replace that mined out resource each year through exploration and/or acquisition. (It’s been years since I’ve heard about an economically significant eight million ounce gold discovery made anywhere on the planet). Even worse, they have to do it within a framework of escalating development costs, increased regulatory and environmental scrutiny and a slew of other risks including expropriation of mining rights and onerous changes (i.e. Mexico) to previously favorable tax regimes.
One could easily envision new gold output on a global basis failing to replace that depleted by mining which will only serve to exacerbate the current supply/demand situation that has seen bullion from vaults in the United Kingdom shipped to Switzerland for upgrading, then to Hong Kong and from there into mainland China never to be seen again. Gold acts as an inflation hedge and even though there’s relatively little inflation in the West, the situation is quite different in China and other Asian countries. The inflation issue is one of the key drivers of gold demand in Asia.
Although trading activity was generally quiet over the Christmas period, gold and silver prices (along with gold equities) moved higher, perhaps a harbinger of things to come. A few analysts are seeing a top in the DOW with some high flyers like Twitter down 14% today alone. It will be interesting to see the impact of the Fed’s decision to slow the rate of quantitative easing on mortgage rates. If they creep up and the housing market heads south, you might well see the Fed reverse its decision. That my friends would have a major impact on the Fed’s credibility and could easily translate into sharply higher gold prices.
Here are a two noteworthy items on gold that appeared in the news over the past few days on Bloomberg which seems to shift from informed comment to trader’s blather from one day to the next. RBC’s George Gero is a particularly astute commentator on the gold market and his suggestion that there are “too many bears in the woods” might well speak to the immediate future of the gold market.