There are various estimates out there that are being tossed out but the general consensus for most gold producers is somewhere between $1200 - $1250 an ounce or so. Obviously, this is painting with a very broad brush as some producers have lower costs than others and some higher costs, but for a ballpark number, it is probably pretty good.
Some are speaking about production cutbacks if gold prices stay down near current levels or drop into that zone noted above. That is probably true but it all depends on the extent and duration of the lower gold price. If it dips down and pops up, production cuts will not occur. If gold looks as if it is going to linger down in that zone for any length of time, some of those cuts will undoubtedly occur.
The problem is that this is focusing on the supply side. The big issue in front of us is DEMAND. If supply falls off, it matters not one whit if demand is dropping at the same time. If supply falls off and demand increases, now that is an entirely different matter. What we are currently experiencing in gold is a fall off in demand, namely institutional demand as evidenced by the continued decline in the GLD holdings, not to mention the downdraft in Comex gold.
We will need to see some sort of stability in the price of gold before buyers will feel comfortable taking the plunge into mining shares again. When that does occur, there is going to be value found among those that are getting their financial houses in order, cutting costs and seeking to achieve value for shareholders.
Don't try to be a hero and catch a falling knife. Let the market tell you when it has stabilized. Underestimating the extent to which these hedge funds and their maulings of markets, both up and down, can destroy your trading capital is a serious mistake. The sums at their disposal are staggering and those who forget this need to be reminded as to how a grasshopper must feel when surrounded by a flock of hungry starlings.
Nice grasshopper simile Dan. Appreciate your aplumb on these crazy days. I have my shopping list of quality companies for when the falling knife has lodged in someone else's back.
ReplyDeleteDan.... God Bless ya. I have to give you credit for trying to give advice in a market that is totally broken.... totally.
ReplyDeleteThe top 5 gold miners break-even may be somewhere between $1,200-$1,400, but their FREE CASH FLOW is in the toilet. You add Free Cash Flow to the mix, and NO ONE is making any money at $1,500 and maybe $1,600... all going into CAPEX.
Sure they can cut costs, high grade, shut down high costs mines, and lay off dead beats to stay alive as the Central Banks continue to pollute the world with worthless Derivatives and Fiat Money.
Declining Ore Grades are killing the mining industry. As the price of energy increases it THUNDERS through the whole system multiplying the impact.
Energy Drives the World.. not Finance. Finance Steers the economy.. and right now in the wrong place as the majority of paper assets are completely worthless or will be as the energy supply will not be there to settle this garbage. Furthermore, the Falling EROI of energy is not even considered... of course due to the fact the IQ's have fallen since the drop of dollar gold peg... we can't blame the business PHd's
Anyhow, keep up the good work... making heads or tails of totally corrupt market.
all the best,
SRSrocco
good letter again and it reminds me of the old story about sugar production costs as it went down to 3 cents; sure we have broken mkts and if anyone does not believe that, then I guess they can explain to me cotton @ $2.20 in 2011 and crude at $147 in '08; sometimes the best thing to do is lay in the weeds and do nothing; we all have to remind ourselves daily that we are in uncharted waters.
ReplyDeleteThe miners should shut-in production. Soft demand in India and China is not helping the demand situation at all.
ReplyDeleteI'm wondering if tomorrow will be capitulation day. Say another $100 drop with another 10% selloff to test 200 on the HUI. The market is throwing a tantrum, and the primary dealers are surely pulling the Fed's excess reserves out of equities to start to prepare for the Fed draining the swamp.