Gold’s drop squeezes miners, delights bullion buyers

Former safe haven play is reverting back to pure commodity pricing.

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.

Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

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

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »