LAWRIE WILLIAMS: Gold nears $1050. Could go lower on Fed interest rates move.
Much as it may grieve me to say so, Jeffrey Currie of Goldman Sachs’ long time forecast for gold to fall to $1050 or lower looks as though it may be coming right – although around a full year later than he originally predicted. This low level has been reached in part due to continuing Fed prevarication on beginning to raise interest rates.
This time around Janet Yellen, with her definitive statement that the Fed would start raising this year, and her colleagues on the FOMC, may have at last talked themselves into starting to raise rates in December, whether this is actually sensible to do so or not – there are mixed views on the advisability of this. The impact, particularly on some other economies than that of the U.S., is hard to predict, and with the interconnections in the global financial system a rate raising decision in the U.S. while others – notably the Eurozone and Japan may still be moving in the other direction – could have some unforeseen consequences with the U.S. dollar finding itself being driven ever higher (the US dollar Index breached the 100 mark on Friday) with adverse effects on the nation’s already disastrous debt position.
Economist and Barrick Gold director, Dambisa Moyo, speaking at the first day of Mines & Money this morning, felt that a current view by FOMC members that the ‘normalisation’ of interest rates by the Fed should only be considered in the context of its effects on the U.S. economy alone, disregarding its impact on the emerging economies in particular, could be a serious error in terms of its effects on the global economy.
But back to the effects on gold. The Fed’s continuing prevarications – the will she won’t she raise rates debate which has occurred throughout the year - has had the overall effect of ratcheting the gold price downwards in U.S. dollar terms. Gold would fall ahead of the eventual non-decision, and only partly recover afterwards. Maintaining the extremely low base interest rate imposition has helped general equities maintain near record levels which has made equities a better place to be than gold for the investor.
The theory now goes that rising interest rates will be bad for gold – but perhaps not if equities fall as a result, and there should be a warning note out there in that the Dow and S&P are only both just about flat over the year to date, and looking potentially fragile. Q3 profits from most major U.S. companies have been disappointing to say the least. A start to raising rates may emphasise the market’s fragility, with many commentators predicting a sharp decline, or even a crash ahead.
But assuming the Fed does go ahead with implementing rate rises starting next month (as currently seems likely) there’s a good chance that the gold price could take yet another knock, although some feel that once rising rates become a fait accompli a re-examination of gold’s supply/demand fundamentals could see it beginning to recover. But an initial fall to around the $1000 mark – or even lower – could be the last straw for many gold miners who are currently hanging on by the skin of their teeth hoping for a gold price improvement.
It should also be borne in mind, though, that gold mining economics, with sales in U.S. dollars, but most input costs in local currencies, are not totally dependent on the U.S. currency alone and those which have seen substantial domestic currency devaluation against the USD may be in a far better position that the USD gold price performance might suggest. These countries include Australia, Russia, Peru, South Africa and Canada which all rank among the world’s top gold producers, but it is those which are located in economies which use the USD, or are tied to it – like the world’s No. 1 and No. 4 producers –China and the U.S. – which will primarily suffer as a result of the strong dollar.
Speaking recently, Randgold CEO, Mark Bristow, is reported as suggesting that around 50% of global gold miners may currently be producing gold at a loss, with the implication that the industry is shooting itself in the foot while putting off more drastic measures involving closures and survival mergers.
However, currency movements may have meant that perhaps Bristow’s reported view is perhaps a little high. Nearly all the major gold producing nations apart from China and the U.S. itself, have seen gold prices perform substantially better in their domestic currencies in which most of their input costs are incurred. Speaking to Pretium Resources’ Bob Quartermain, on the sidelines of london's big Mines & Money conference this morning confirmed this viewpoint. Pretium is building an ultra high grade major gold mine in BC, Canada and Quartermain pointed out that the Canadian dollar has fallen from near parity with the USD to around 0.75 over the past two years and with around 70% of the mine’s input costs in Canadian dollars they are now re-evaluating the anticipated capital expenditure, originally stated in USD, with the expectation that it will come down fairly substantially when the new calculations are in. Canadian inflation rates remain low despite the currency depreciation. Pretium will not be unique here and the cutting of mining costs by most gold miners, coupled with the fall in the Canadian dollar means the Cnada's gold miners may be in a better position than that suggested by a fall in the U.S. dollar gold price.
A report just out from Australia’s Surbiton Associates draws a similar conclusion regarding the economic situation for the Australian gold mining sector. The current gold price in Australian dollars is around AUD$1460 compared with the USD price of $1055 at the time of writing. Here again the Australian dollar has fallen from around $1.1 AUD:USD in 2011 to 0.72 currently – a fall of a massive 35% since mid-2011. Russia is another case in point where there has been a massive devaluation of the ruble against the U.S. dollar. These are among the world’s largest gold producing nations – Australia No. 2, Russia No.3 and Canada No.7 but as can be seen the economics of gold mining there will be very different from in the U.S. or China.
At the moment the gold price though has been performing almost exactly counter to the growth in the U.S. dollar index. Gold has fallen around 10% in U.S. dollars year to date, while the dollar index has risen around 10% over the same period. It would need a break from this pattern to see any serious positive movement in the gold price.
But assumptions regarding a potential increase in the U.S. dollar index subsequent to the Fed beginning to raise interest rates could be mistaken. Talking to gold expert analyst Ronald Stoeferle of Incrementum AG – who publishes the hugely informative In Gold We Trust analysis of the gold market each year – on the sidelines of Mines & Money, he commented that he has charts showing that following previous interest rate rises in the U.S. the dollar has actually fallen and commodity prices have risen. These will be shown in a presentation tomorrow – perhaps we will have to wait until then for our next comment on the state of the gold sector. This exact same point was also made a little later in the morning by Jim Mellon in discussion with Willem Middelkoop.
Meanwhile Mines & Money continues for the next four days with a financial trade show opening tomorrow. No doubt there will be plenty of other points made by key speakers throughout the event - and networking opportunities on the sidelines abound too. It should be an interesting few days for the followers of the resource sector.