The spot gold price has been sinking, hitting an eight-month low last week, as the gold metal loses its lustre, and looks headed much lower.
Gold has been hit by a number of factors, including a stronger US dollar, a recovering US economy, a lack of inflation and the potential for higher US interest rates as early as March next year. Exchange trade funds (ETFs) backed by gold saw outflows of US$6.7 billion since June this year, according to the Australian Financial Review (AFR).
Assets in the SPDR Gold Trust, the largest ETF backed by gold, have fallen to their lowest levels since December 2008.
Gold was last trading at around US$1,216 an ounce, a far cry from above US$1,800 an ounce the metal hit around in early September 2011. As Brian Levitt, economist at Oppenheimer Funds in New York told the AFR,
"There are no compelling reasons to be in gold," and added, "There are no inflationary pressures, you have a central bank (US Federal Reserve) that's going to tighten sooner than most of its trading partners. That to me portends a [US] strong dollar and weaker gold prices."
Where the price will end is unknown, but many might assume that it should trade around the marginal cost of production. Unfortunately, no one really knows what that is. Estimates range from between US$1,000 to US$1,250 an ounce, but that may be too low, given many gold mines have costs well above that, and very few have all-in sustaining costs (AISC) below the US$1,000 mark.
Doray Minerals Ltd (ASX: DRM) and Beadell Resources Ltd (ASX: BDR) boast of costs of A$1,044 an ounce and US$805 to SU$855 per ounce respectively. Newcrest Mining Limited (ASX: NCM) has ultra-low production costs at some of its mines, but that's mainly thanks to massive amounts of copper which is mined at the same time, offsetting costs. Then you have a company like Kingsgate Consolidated Limited (ASX: KCN), which has estimated costs of US$1,026 an ounce.
Investors should also be aware that all-in sustaining costs don't include interest costs and corporate income taxes, hence actual costs are likely to be higher than the company's quote of AISC.
I should also note that I recently sold out of all the gold mining stocks I owned – disappointed with management who aren't up front with shareholders on costs and seemingly fanciful production forecasts. Paraphrasing Mr Levitt above – there's no real reason you need to invest in gold [or the miners].
