What inflation?
excellent piece by Howard Marks on the value of gold:
http://www.oaktreecapital.com/MemoTree/All%20That%20Glitters%2012_17_10.pdf
He makes a valid point (although not really original) that gold price is basically a function of subjective and maybe irrational desire. However, I disagree that this cannot be modeled. If we model the earnings of some company like Apple, we are assuming some sort of subjective desire for their product. If we were to model gold, we would need to assume some desire for gold, and then make some demographic projections about the # of people who desire that gold, adjusting for mining rate or other supply variables.
Gold is pretty tough to model, but not that hard to predict. I called $1,200 back in April in another post (that I would cite if we had a search function that actually worked) and said if it cracks further we could be looking at $800. There are plenty of gold bulls - which I still count myself among - that aren’t freaking out.
However, there are some new fundamentals to consider. Real interest rates are no longer negative. That’s bearish for gold. And, of course, QEnding is still looming. The strength in the dollar is a huge headwind but that’s likely transitory.
On the flip side, a new point for the bulls that comes with a $1,200 spot price; that’s how much it costs to get it out of the ground. Mines will go dark if the price goes any lower and supply will dry up rather quickly. Buying under $1,200 is a good entry point for long-term holders.
Remember in 2007 when oil went up to $147 then down to $30 or so? The cost to produce a barrel of oil is about $70. Buying below that is a good investment because is unsustainable. However, if you bought as soon as the price went below $70 you would have felt some pain as it went all the way to $30 before eventually moving back above production costs. Same thing could happen to gold here. It could very well go to $800 before starting the climb back to $1,500 and beyond.
I’m not so sure if modeling a commodity is anything like modeling a company.
It costs $1200 to mine gold? Why the hell were they mining it when the crap was at $400???
Same goes for oil…
Something doesn’t make sense. Or are we saying that mining equipment and purchasing mine-able land costs that much more today and hence the higher costs…
Most of the easily accessible gold and oil has already been mined/withdrawn. As the remaining ore is lower and lower grade, it takes more energy to get at it. Plus environmental concerns raise the cost of these activities.
I’m surprised that production costs are as high as $1200… do you have a source on that, STL?
There weren’t nearly as many mines operating when it was at $400. You definitely wouldn’t see shows like Gold Rush on TV. The mines that were around also mined other metals out of the same location so it spread out their cost…not as many pure gold mines (and especially silver) as today.
But shouldn’t technological advances somewhat offset the less accessible problem? I am sure the equipment today is a lot better than someone scooping a handful of mud and picking out the gold nuggets?
PS a nice link on costs. Hope its reliable…
http://www.visualcapitalist.com/what-is-the-cost-of-mining-gold
It says the all inclusive cost is $920. Which is still a lot higher than what I had in mind
It varies by location and by mine, but here’s something from GS via ZH that tells the story fairly well:
http://www.zerohedge.com/news/2013-06-26/gold-drops-below-its-average-cash-cost
What is the difference between marginal cash cost and cash cost?
Edit: Also, I’m a bit confused by this statement:
" not even Bernanke and all the paper Gold ETFs in the world will be able to do much to suppress gold prices from reaching their fair value when gold production hits a standstill, and when demands, especially by China, is still in the hundreds of tons each year."
What is the “fair value” of gold?
^ That quote is highly misleading. It assumes supply is halted while demand continues to rage. There’s nothing strange at all if supply is accelerated and demand dries up.
Gold’s value is whatever the balance of supply/demand says it is at any given time.
I’m not a believer in it. it’s a metal that sits there. no dividends, no earnings, no growth. It’s a pure store of value. at least copper and silver have much more industrial uses. Gold for jewelry isn’t big enough.
Gold ETF’s simply introduced massive volatility to its value making it a riskier asset class.
Maybe http://www.analystforum.com/forums/water-cooler/91321205?
You said if it goes below 1335 then it could go to 1200.
This man knows what he’s talking about.
If you did a survey of oil and gas companies, most would say they stop producing between $65-75 a barrel because they can no longer justify the capex spend for most sources of oil (or most of the ones that are accessible with available rights). Asset prices tend to overshoot in both directions because of trend following strategies.
I’ve never heard of the $1,200 number for gold though, would be interested to see a source for that. Also, what exactly is gold useful for outside of some niche industrial applications? It’s definitely not as useful as oil.
ask Paulson what he thinks of gold these days…
my opinion on gold is the same as itera’s above and to Mark’s…and I would never hold it in my portfolio
if i want an inflation hedge i will invest in real estate
@bromion & bchad - I’ve done my own due diligence and came up with the $1,200 figure for the miners that are on the “pure play” side of the spectrum (i.e. they only mine gold). And, it matches several sell side reports I’ve read along with tidbits from ZH, Harvey Organ, et at. Figuring out the cost for the pure play miners is extremely simple math. It gets trickier when you look at a company like Barrick that mines several different metals in several different countries. Naturally there’s some scale to the business so the bigger miners have lower costs. My best guess would be around $1,000 for ABX, maybe slightly less.
Silver is a much more interesting case. The cost per ounce is can be anywhere from $12-18 depending on the mine, but what makes silver different is that up until a few years ago there really weren’t more than a handful of mines that were dedicated silver mines. Silver is generally a byproduct metal. As people mined copper they’d come across silver and sell it as a secondary source of revenue. Once they price went above $20 smaller pure silver mines started popping up. Under $20 and it really isn’t that attractive to produce silver at these smaller operations.
But things have changed for silver over the last decade. Now it’s a very important industrial metal and demand is fairly stable. The market has become dependent on ~700 million ounces produced each year. If the price stays below $20 for long there will be a supply/demand imbalance. As a couple of you have stated, gold really doesn’t have any use other than being money (ok, I added that last part) but silver does. Can’t make a cell phone without it. Demand is much more stable than the gold market.
Why would you be a pure gold miner? Sounds very inefficient to me. Obviously the ground has many metals and minerals other than gold.
So what do they do when copper and whatever other metal that is commonly found with gold gets accidentally ‘mined’? Just discard it?
Sure, even the “pure” gold miners find other metals along the way. They sell them as well. That’s why when you look at the quarterly reports from gold miners they state production in “gold ounces” and “gold equivalent,” the latter being all the metals mined and then “converted” as if it was all gold. So if they get 66 ounces of silver they just call it one ounce of gold.
Most the the “pure” gold miners get about 90% of their revenue from gold.
The $1200 is the gold equivalent cost or the actual gold cost?
If its actual then we can reduce it by ~10% and say that breakeven is more like $1080?