By Ivan Y.
Bottom picking in gold (GLD) or any other asset is a fool's game. Gold investors trying to pick the bottom in gold will most likely miss it. Instead, gold investors should identify a bottom price range and invest at various points in that range. Though last Thursday's low probably was not the absolute bottom, I believe we have already entered the bottom price range in gold. One of the reasons I believe this is because gold is approaching the all-in cost of production. I took a look at the Q1 2013 earnings reports for eight of the largest gold producers in the world to see what their production costs were.
- Goldcorp (GG): $1,135 (all-in sustaining cost)
- Newmont (NEM): $1,086 (all-in sustaining cost)
- Barrick (ABX): $919 (all-in sustaining cost)
- AngloGold (AU): $1,147 (total production cost)
- Yamana (AUY): $856 (all-in sustaining cost)
- Kinross (KGC): $1,038 (all-in sustaining cost)
- Gold Fields (GFI): $1,291 (notional cash expenditure cost)
- Newcrest (NCMGY): $1,128 (total cost)
Most of the companies report an "all-in sustaining cost". This includes the cash cost plus sustaining capital, G&A, and exploration expenses. The unweighted average cost for these eight companies was $1,075 per ounce.
Based on these numbers, it appears that the current price of gold is still above the production cost. This suggests to me that gold is in the mid to high end of its bottom price range. The low end of the range is likely the average global production cost. Gold will likely not breach the low end of the range, but if it does it will not stay there for long because gold miners will begin to reduce production or suspend operations if the gold price is lower than their cost. Here are a few examples of that happening already (Goldplat, Atna, Tanami). While a reduction in mine supply will not immediately affect the price of gold, ultimately the price of a commodity is determined by the supply and demand, so a price below the cost of production cannot be sustained for too long.
Is the All-In Cost Higher?
I tried to include Agnico Eagle (AEM) and Eldorado (EGO), but it appears neither company reported an all-in cost in Q1, so I based my average cost on only eight companies. A more comprehensive study was done by Dundee Capital Markets. They calculated the all-in production cost for the top 20 gold producers for Q4 2012 to be $1,306 per ounce. It is not stated whether this is a weighted or unweighted average. But if we go with this number, then the current price of gold is already below the cost of production and thus the current gold price is at the low end of the bottom price range.
Currently, the cheapest way to invest in gold is through Central GoldTrust (GTU). I mentioned this closed-end fund in an article a couple months ago. Since that time, GTU has gone from a 0.4% discount to net asset value to a significant 6.2% discount. Though the current price of gold is $1,276 (Tuesday close), the market is pricing GTU's gold assets at under $1,200.
If you are a long-term investor, the current price of gold should be in the bottom price range, regardless of whether it is at the low, middle, or high end of the range. Investing at this point should be profitable in the long-term. In my opinion, gold will likely move lower this summer, but over the long-term the secular bull market in gold should propel gold higher than it is now, which should correct the mistake of buying too early if gold has not found its absolute bottom yet.
Additional disclosure: I am short GLD