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Sunday, June 19, 2011

new case for gold

new case for gold : If you’re buying gold, or thinking of doing so, it’s probably because you believe gold isn’t a commodity at all. Instead, you may think of it as a de-facto currency. But after rising almost 700 per cent since 2000 and 25 per cent over the last 12 months, is there still a case for it?

After ballooning eightfold in a decade, one would expect producers to pump out more gold. That hasn’t happened.

While more money than ever is being spent on gold exploration, supply has barely risen, partly because mining costs have risen dramatically.

Prices for labour, equipment and fuel - all vital in gold production - have rocketed.

Grades have been falling for years and miners have been forced deeper into the earth for new supply. For the foreseeable future at least, the toxic combination of lower grades at depth means the days of $US500 an ounce are over.

The marginal cash cost of production is a more difficult number to pin down. Some argue that average cash costs in the industry are only $US500 an ounce; others insist that costs are above $US1000.

Our estimate is about $US700 an ounce but it’s the cost of additional supply - the marginal cost - that drives prices, not average costs.

On top of cash costs we must add capital costs, replacement and discovery costs and a rate of return, which means a price of between $US1000 and $US1200 may encourage new supply.

That’s far higher than at any other time in history but a fair way below current prices of about $US1500 an ounce.

Does that mean gold is expensive and we should head for the exits?

Not necessarily. The cost of supply may have caught up with prices but demand has also grown because some investors see it as a better store of value than many currencies.

The GFC resulted in a transfer of debt from private into public hands.

Governments, including the United States, are saddled with debts they have shown little interest in repaying. Instead, they prefer to debase their currencies by printing money.

In such a scenario, gold - a touchstone currency for centuries - is likely to maintain its historic role.

The case for gold has therefore changed. A year ago, it was possible to buy gold below the marginal cost of production. Today, that’s not possible.

Buying gold now is a far more speculative activity as a result, one based on views about how governments will solve emerging debt problems than anything else.

Gold could still be worth buying as insurance against currency debasement, but with a price above the marginal cost of production, it isn't for everyone. source : http://www.smh.com.au
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