Could gold fall to $1,000 per ounce?

Last week I wrote that investors in gold miners had an outside chance of witnessing a healthy boost to share prices early this week.

The potential for a jump in the gold spot prices would’ve came from the ‘Save Our Swiss Gold’ referendum yesterday. The vote on increasing gold reserves at its central bank to 20%, from approximately 7% currently, would mean the Swiss National Bank (SNB) would hold $540 billion of gold on its balance sheet.

However the initiative was shot down in dramatic fashion, with 77% of voters against the idea.

Looking forward, some analysts believe the gold price could again test its recent four-year low of $US1,132 per ounce as prospects for rapidly increasing inflation subside.

What this means to Aussie miners

Although the ‘no’ vote will have a more pronounced effect on gold miners, the spot price – down 1.3% to $US1,152 per ounce today – isn’t likely to come under immediate selling pressure.

However the results of the Swiss vote are yet another faded hope for Australian gold mining investors.

Indeed shares of Australia’s two largest gold miners Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) are down 5.22% and 11.9%, respectively, in early morning trade.

Smaller miners OceanaGold Corporation (ASX: OGC), Troy Resources Ltd (ASX: TRY) and Medusa Mining Limited (ASX: MML) are down 13.8%, 9% and 8.5%, respectively, at the time of writing.

Are mining stocks cheap?

A reasonable estimation of the intrinsic value of gold mining stocks requires analysts to make four difficult guesstimates:

  1. Future gold prices (which includes an understanding of global markets, inflation etc.)
  2. Costs of production across the life of a mine
  3. Value of reserves and resources
  4. Success in exploration activity

Then there’s the usual risks and uncertainties inherent to investing in public companies such as competent management and financial health (including capital management).

When all of these assumptions combine, individuals could earn a living from investing in gold. However, it’s important for average investors to remain within their circle of competence as often as possible, if not always. And with some analysts saying gold could reach $US1,000 per ounce, investors would be wise to tread carefully.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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