South Africa May Soon Be Producing Gold At A Loss

This Wall St Journal video reports on the fact that many gold mines in South Africa are not able to operate with gold prices at or below recent levels.

As we recently recounted here on the blog, labor unrest and demands from the mining unions in South Africa for the government to forbid the mining companies to lay off workers are running headlong into a very difficult economic reality. To exacerbate the situation, now some labor leaders are calling for nationalization of platinum and gold mines.

Many gold and platinum mines in South Africa may soon be idle. The question is, will the stoppage be voluntary or not.

How Low Can Gold Prices Realistically Go?

With some people on popular cable shows once again predicting gold to drop to $1,100 an ounce or even lower, I thought this may be a good time to inject some real world numbers into the conversation by looking at what it actually costs to get the gold out of the ground.

Seeking Alpha had a wonderful series of articles by their contributor from Hebba Investments on the “all-in” costs of gold mining. Mining companies until recently only used part of their expenses in calculating cost-per-ounce, ignoring capital expenditures, etc.

Looking at the 2012 financials for the top 12 gold mining companies, we find that costs per ounce range from $1,057 for Alamos Gold to $1,423 for Kinross Gold (all numbers excluding writedowns.)

If spot gold were selling at $1,100 an ounce, only Alamos and GoldCorp would be making a profit, and only barely. Obviously, a price of $1,100 is unsustainable.

Some may point out that there are other sources of gold, such as recycling. Jewelry is a major source of scrap gold, which traditionally provides as much as 1/3 of global gold supply. However, TD Securities predicts that 2013 will see the lowest level in four years of gold sales for scrap by the public worldwide. The global shortage of jewelry, bars and coins at the retail level for the last month points to a new appreciation around the world by the average citizen who is looking ahead at what currency debasement and unbridled quantitative easing will eventually bring.

 

by David Peterson

Market Update May 10: Dollar King For A Day

Today is seeing world markets reacting to a surge in the U.S. dollar. The DXY dollar index is well above 83, as the greenback rockets higher. The surge in the dollar allowed the yen/dollar to break the psychologically important 100 yen level, taking the yen to a four and a half year low, and boosting the Nikkei stock index to a five and a half year high. The drop in the yen is going to upset other exporting nations in Southeast Asia. Coming as this does on the heels of yesterday’s surprise interest rate cut by the Bank of Korea, we may be looking at a regional currency war.  The drop in the yen also led U.S. officials to warn Japan over currency devaluation this morning.

Part of the dollar’s sudden strength is being attributed to unsubstantiated rumors last night that the U.S. Federal Reserve may take the recent better than expected employment numbers as an excuse to cut back or even stop the $85 billion a month in bond and mortgage purchases of its quantitative easing program.

As the dollar does a Hulk impression on commodities today, gold was smashed below the $1,445 level, which triggered some sell stops.  COMEX gold futures for July delivery were down as much as $41 an ounce, while spot gold was only down as much as $29.60 an ounce, showing a larger divergence than normal.

Some pundits have been predicting a “decoupling” of physical gold prices from futures contracts. The recent unprecedented global gold rush for physical gold when prices collapsed in mid-April was seen by some as validation of this theory. However, physical demand is unable to maintain that level of purchases indefinitely, and the leveraged nature of “paper gold” means that it will continue to influence the overall price of the precious metal.

 

by David Peterson

Morning Market Update May 1: May Day?

Gold is seeing marked consolidation today on disappointing economic news and some profit taking ahead of the FOMC meeting press release this afternoon. A slowdown in Chinese PMI was notably bearish for industrial metals overnight, including silver.

With the May Day holiday in much of Europe and the last day of a three day Chinese holiday today, much of the physical buying in precious metals that has been supporting prices is absent. Many traders are also standing aside today, waiting on the FOMC announcement and the ECB rate decision tomorrow.

In the U.S., the ADP private payroll report was much weaker than forecasr – a 119,000 gain versus the 158,000 expected. Adding to the recent string of bad economic news, construction spending hit a 7-month low, and manufacturing activity slowed down in April.  This has stocks lower, and the dollar hit a two-month low. Oil prices are also down on fears of global economic slowdown.

The bad news should pretty much clinch a decision by the Fed to continue its $85 billion a month bond purchase program to inject liquidity into the market and keep interest rates near zero. However, the economy will have a hard time turning around if the banks continue to hold the cash instead of lending it to businesses and consumers.

The bad news from the U.S. combined with weak economic news in Europe to spark some profit taking. The euro currency rose above 1.32 against the dollar.

In Japan, the Nikkei was also down on bad earnings reports in the semiconductor sector and some profit taking. Markets in Hong Kong and China are closed.

With today’s lighter volume in precious metals, we may see some intermediate stops triggered. If so, the return of more physical buyers tomorrow may result in some bargain hunting. It is hard to imagine the Fed curtailing quantitative easing or raising interest rates in this environment. Ultra-low interest rates reduce the opportunity cost of holding precious metals, though gold ETFs are still seeing outflows as investors chase returns in the equities markets.

by David Peterson