Another day, another mauling for bullion as even the gold bears scratch their heads at the sudden reverse in the metal’s fortunes. Conspiracy theorists are also emerging, shouting about manipulation by secret forces. But the reality is more rational. With demand drying up after QE’s hyper-inflation bogey failed to materialise, the gold price has been living on borrowed time for months. It was always going to take some seemingly innocuous news to tip the scales. And as in any area influenced by Mr Market, once the mood turns, momentum selling makes predictions self-fulfilling. As the Newmont Mining reaction shows in our second piece published here, the industry is also bracing for even worse times. – Alec Hogg
By Jasmine Ng
(Bloomberg) – Gold’s been mauled this week as commodities sank to a 13-year low. It may get a lot worse, according to Morgan Stanley, which said that under its worst-case scenario bullion may tumble to $800 an ounce.
To get there requires U.S. policy makers to start raising interest rates, another correction in China’s stock markets and a selldown of reserves by central banks, analysts including Tom Price said in a report. The metal is more likely to trade at about $1,050 an ounce, according to the bank, which left its 2015 forecast unchanged. The price was at $1,098 on Thursday.
Gold’s fallen out of favor with investors as the Federal Reserve prepares to increase borrowing costs, boosting the dollar. Prices could drop below $1,000 an ounce, according to Goldman Sachs Group Inc.’s Jeffrey Currie, while Standard Chartered Plc said it will probably extend losses. The rout in bullion helped to drag the Bloomberg Commodity Index to the lowest level since 2002 as crude oil and base metals fell.
“The backdrop for this commodity complex is deteriorating,” Morgan Stanley said in the July 22 report, referring to precious metals. The bank’s unchanged forecasts have greater downside risk after July’s selloff and persistent weakness in China’s equity markets, it said.
Gold for immediate delivery sank to $1,086.18 an ounce on Monday, the lowest level since March 2010, according to Bloomberg generic pricing, and it last traded below $800 in 2008. Morgan Stanley’s 2015 forecast is $1,190.
ETPs Shrink
Investors are cutting positions in bullion-backed exchange- traded funds as prices drop and banks issue bearish forecasts. The holdings shrank 4.8 metric tons to 1,560.7 tons on Wednesday, dropping for a fifth day, data compiled by Bloomberg showed. They’ve contracted in nine of the past 10 quarters.
Fed Chair Janet Yellen reiterated last week the central bank will boost borrowing costs this year, and economists projected a 50 percent chance of liftoff in September, according to the median probability of 46 economists in a Bloomberg survey. Higher rates can draw investors toward bonds and away from gold.
China’s announcement last week that it had added less gold to reserves in recent years than had been expected hurt prices, Morgan Stanley said. The update from China followed other events that were bearish for bullion, including lower risks from the Greek debt crisis and prospects for higher rates, it said.
“It’s possible that the next short-term driver in metal markets will be declining oil prices,” Morgan Stanley said, citing crude prices in the U.S. and Europe that dropped between 10 percent and 16 percent in the past four weeks.
Newmont cutting costs below $700 to be “last man standing”
(Bloomberg) — Newmont Mining Corp., the largest U.S. gold producer, reduced its outlook for the cost of mining this year, a sign that the slump for the metal that took prices to a five- year can keep going.
The forecast for so-called costs applicable to gold sales was cut to a range of $630 an ounce to $680 an ounce, from $660 to $710, the Greenwood Village, Colorado-based company said in a statement Wednesday.
“It’s probably a sign the rout in gold will continue,” said Martin Leclerc, the founder and chief investment officer of Barrack Yard Advisors LLC, which oversees $160 million. “Newmont is positioning itself to at least be the last man standing.”
Gold’s drop to the lowest since 2010 has investors focusing on metal-production costs, because they’re trying to see how far prices will drop before output is cut back. Even as Newmont reports net income that fell 61 percent from year earlier to 14 cents a share last quarter, lower energy expenses means that it’s getting cheaper to mine and the company is expanding production as it tries to reduce debt.
Newmont is working to cut costs and debt after a sustained slide in the price of the metal, which dropped to a five-year low this week. A rout in bullion this month has sapped investor confidence in gold miners, sending the benchmark 30-member Philadelphia Stock Exchange Gold and Silver Index of the largest producers to its lowest since 2001.
Oil Prices
“Favorable oil prices and exchange rates largely offset the impacts of lower metal prices,” Chief Executive Officer Gary Goldberg said in the statement. “Based on this performance, we are improving our full-year outlook for both production and costs.”
Newmont’s so-called costs applicable to sales averaged $638 an ounce in the second quarter, compared with the $654 average of eight estimates compiled by Bloomberg.
“It is a trend that’s been taking place across the board for the miners,” said Dan Denbow, a portfolio manager at the $600 million USAA Precious Metals & Minerals Fund in San Antonio. “They’ve been having to live with lower commodity prices, and therefore you have to adjust your operating cost if you’re going to keep making money.”
Newmont’s earnings excluding one-time items were 26 cents a share, trailing the 27-cent average of 15 estimates compiled by Bloomberg. Sales were $1.91 billion, lower than the $1.99 billion average estimate. Second-quarter gold output rose to 1.24 million compared with 1.22 million ounces a year earlier and the 1.18 million average of nine estimates.
