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Gold’s drop squeezes miners, delights bullion buyers

Gold, once considered the best safe haven during the GFC storm, is still taking a battering. Although it has made a temporary bottom at around US$1,200/oz, the trend is clearly down at this time.

The price may rise or fall slightly on current news of the US Fed’s on-again, off-again plans to taper, or European financial markets may be bottoming out, signalling possible near-term economic improvement. However, those gains or losses are given up quickly, so investors have to look at market forces and the roles gold plays in commodity markets.

Currently hovering around US$1,300/oz, investment bank Goldman Sachs announced a $1,050 price target, which hasn’t been seen since February 2010. Even further, the precious metals director of Kitco Metals, Pete Hug, stated that he could see gold breaking the psychological barrier of $1,000, adding that this outlook is based on investors believing in a broad-based recover in Europe and the US, as well as interest rates there returning to normal levels.

Gold miner Newcrest Mining (ASX: NCM) has been driven down to share price levels that haven’t been since 2004. Recovering to about $11.80 from a $10.00 bottom, its profit margins are getting squeezed even though its main mines have lower than average gold production costs.

It was reported this month that Alacer Gold (ASX: AQG), a Canadian gold miner listed on the ASX, sold its Australian business unit to Metals X (ASX: MLX) so that it can concentrate on its Turkish gold mine assets, which have lower production costs. Metals X bought the gold mine assets for a reported $40 million, and will take control of the mines on 1 October.

On the world stage, Chinese gold imports from Hong Kong have been increasing steadily since January, up to 27.8 million ounces in July from 5 million ounces in February. Clearly, Chinese investors and consumers are taking advantage of lower gold prices like a supermarket discount sale.

India currently stands as the world’s largest importer of gold, but China is moving in quickly, and may snare the top spot this year when it is expected to import around 1,000 tonnes of gold.

India’s import levels have fallen off since July when the Reserve Bank of India introduced policy to decrease the net importation of gold. Confusion in how the policy will be conducted caused major banks and trading agencies to halt imports, causing a 70% drop in imports in August.

Foolish takeaway

If you are not a gold bug or doomsday prepper who is waiting for the world economy to collapse, then gold is only a commodity, driven by pure supply and demand. Gold prices sold off in 2006 and 2008, only to break through the previous high, and drive up further. If you invest in gold, then this sell-off may a point of entry for the next leg up.

As to when that comes, watch large importing countries’ and central banks’ purchase levels. For mining stocks, find out what their mines’ extraction and production costs are, and compare that with the current and projected gold prices.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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