Industry analysts predict further drops in the run-up to next month’s meeting of the Federal Reserve
Half of Gold Output May Not Be ‘Viable’ as Price Sags: Randgold
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Gold prices fell yesterday in response to the dollar’s bounce after healthy US economic data raised expectations of an interest rate rise next month.
Prices hovered just above their lowest level in nearly six years, as spot gold fell 0.4 per cent to $1,070.46 an ounce, perilously close to the near-six-year low of $1,064.95 it hit last week.
The latest drop came after it was announced that manufacturing output rose well above economists’ expectations last month. A gauge of business investment plans in America also painted an optimistic picture.
“The orders number is surprisingly positive and that’s what’s weighing on the market,” Rob Haworth, the senior investment strategist for US Bank Wealth Management in Seattle, told Reuters.
Gold has been put under pressure by increasing speculation that the Federal Reserve will raise US rates next month for the first time in nearly a decade. Such a move would increase the cost of holding non-yielding bullion, having a knock-on effect on prices.
But Commerzbank analyst Daniel Briesemann said geo-political issues had played a part and predicted further falls for the precious metal. “The Turkey-Russia tension has only had a limited impact and now gold is back on its downward trend mainly due to the dollar and rate hike expectations,” he said.
“Uncertainty before the next Fed meeting will remain high and prices could head even lower in the next couple of weeks.”
Traders said dealings were relatively quiet ahead of America’s Thanksgiving holiday today.
Gold price resumes downward trend
With speculation mounting over a possible Federal Reserve interest rate rise over the next few weeks, the gold price has resumed its downward trend after a brief rally at the end of last week.
Having fallen as low as $1,062 an ounce during trading last Wednesday, gold rallied on Thursday and was at one point a few dollars above $1,080. But after a dip back to below this level on Friday, the precious metal dropped again to below $1,070 in Asia overnight, where it remains rooted this morning.
Gold has fallen for 13 consecutive trading days out of 16 in Asia, while for each of the last five weeks in both London and New York it has closed lower than it started. The precious metal’s short-lived recovery last week now appears to be little more than a relief rally in a bear market.
The latest fall follows comments on Saturday from San Francisco Federal Reserve chief John Williams, who the Wall Street Journal reckons is a good barometer of wider monetary policy opinion. Williams says that if nothing happens to derail current economic trends, “there’s a strong case to be made in December to raise rates”.
Rate rises hurt gold and other non-yielding commodities relative to income-generating assets. More importantly, Williams’s statement has boosted the dollar – against which gold is typically held as a hedge – to a seven-month high.
Where is the gold price likely to go from here? OCBC Bank analyst Barnabas Gan has told Reuters that the current price – in fact any price around $1,080 – indicates that investors are “sitting on the fence as they await the [Fed] meeting in December”. As a result, he believes the downward trend in the price of gold is likely to persist over the next couple of weeks.
Almost all traders appear to be united in their view that the gold price will fall further if the Fed does decide to raise rates in the forthcoming weeks. Even Jason Hamlin, a self-designated “gold stock bull” who reckons that gold is currently “oversold”, writes on Seeking Alpha, the financial website, that the recent price drop is a sign that the metal “will test $1,000 in the near future”.
Hamlin says that if support for gold holds up in the event that the Fed decides to keep rates as they are – or makes it clear that the rates rise is a “one and done” increase (i.e. a modest rise that will be the last for some time) – then it is not unthinkable that a rally could push gold towards a substantially higher price of $1,200 an ounce.
The more we continue to produce unprofitable gold, the more pressure we put on the gold price,” said Randgold Resources Ltd. Chief Executive Officer Mark Bristow. “In the medium term, it’s a very bullish outlook for the gold industry. The question is, how long are we going to supply it with unprofitable gold?”
Gold fell to a five-year low on Friday as a rising dollar and speculation that U.S. policy makers will boost interest rates next month curbed the appeal of bullion as a store of value. While industrial metal producers have promised output cuts, “we don’t have that psyche in the gold industry, we just send it off our mine and somebody buys it,” Bristow said in an interview in Toronto.
Gold miners buffeted by the drop in prices are shortening the life of mines by focusing only on the best quality ore, a practice known as high grading, which will restrict future output and support higher prices, according to Bristow. He said in a presentation to bankers in Toronto that the industry life span is down to about five years because companies have been aggressively high grading at the expense of future production.
“The industry has moved away from looking at optimal life of mines because everyone is trying to demonstrate short-term delivery,” he said. “Where is all this value that people promised in the gold industry? It’s not there.”
Traditionally, the industry would address this through “survival consolidation and mergers,” Bristow said.
He said earlier this month that Randgold continues to look for projects to buy, but has been frustrated by companies excessively pricing assets.
London-listed Randgold’s 10-year annualized return of 19 percent is the best performance among major producers tracked by Bloomberg.
Gold futures for February delivery declined 1.2 percent to $1,056.60 at 10:12 a.m. on the Comex in New York. Earlier, the price fell to $1,051.60 an ounce, the lowest since February 2010.
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