Check this report form https://www.mining.com/gold-miners-continue-cut-costs-production-finally-raise-money/ - it is a year old but it shows the following crucial chart:
This is the average all-in sustaining cost ("AISC") of gold production from Q1 2017 to Q4 2018. While a glimpse is not enough of an historical base, until I find out additional data - I would presume the following: (i) Most of the time, Average Gold Price ("AGP") will be higher than AISC by a factor of 100 - 250 USD corresponding to 10 to 25% of AISC and (ii) Following 2010, AISC is has been around 950 to 1100 USD with the latter years being closer to 1000 USD.
This ultimately means that higher prices drive more production with a lag and thus the price normalizes. This normalization is supported by selling from other actors in times of steep price increases as well. There are obvious deviations from this price action mostly on the appreciation side due to geopolitical scares and or major economic developments.
The recent run up in gold prices is the result of the build up in the second half of 2019 that lead to a breakout during the coronavirus induced market volatility in March 2020. It is interesting that the initial run up was followed by a steep fall from 1700 to 1450 which later was reversed by FED's expansionary monetary policy.
The current spot price is 1625 with futures in Comex at 1640 showing unprecedented disruption in the gold supply chain. Barring this imbalance, AISC has probably came down during this period as general deflationary tendencies are creeping in to all production. The spread from around 1000 AISC to 1625 AGP is (presumed to be) historically too high.
If previous price action is any guide, a steep sell of towards a wide range of 1250 - 1450 should be expected. The extraordinary spread I am suggesting is due to the coronavirus. If there are future legs in the healthcare crisis, I would expect AGP to be effected adversely as the utility of holding gold in a deflationary environment is limited. However given flight from other assets might resume and/or gold might benefit in a relative manner, the correction in price could be less severe. Nonetheless, a major correction is in the cards.
Finally as a side note, Bitcoin and gold have been behaved directionally similarly following FED action as never seen before in the last two weeks. While the correlation* between the two assets is still very limited, watch out if a correction in gold triggers a fall in Bitcoin as well.
March 26, 2020
*Correlation link opens coinmetrics but you would need to enter GLD to chart the correlation. For some reason, it automatically shows BTC LTC first.
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I will admit error and a change of opinion on a subject.
ReplyDeleteGiven that liquidity problems in general are resolved by Central Bank facilities, a crunch sale that spreads to safe assets is and will be avoided.
That being said, longer period low interest rates, high debt burden, adequate market liquidity, uncertainty, global political concerns and growing mistrust of fiat currencies will help to provide a base for altnerative store of value of assets.
Consequently a production cost approach will not provide a viable benchmark to analyze Gold. With this in mind, a higher base is warranted but the real interesting aspect to watch is whether this will hold as a base (i.e. 1600–1800 range) or would we see a breach?
I would expect this large price band to hold but if the lower probability event of 1800 upwards breach happens, then this would be a very interesting event to watch. On the downside,with this global backdrop, we could expect strong demand as there is a lot more money that can chase a low new flow / stock item. If this expectation takes precendence and 1800 is breached, then a significant new high will be in sight. However what makes this interesting would not be the price alone but the global backdrop in which this happens.