Gold May Drop To $1050 An Ounce By Year End

| About: Barrick Gold (ABX)

Summary

It takes about $1050 USD to produce one ounce of gold but gold trades at close to the break-even point now.

Technicals warned us on September 30, 2016 to be cautious.

Gold plunged 4.8% within two days (October 4 - 6); one of the biggest single-day drops.

Gold mining companies have been losing money for the last 11 years; margins in the gold sector are very tight.

Historically, most of the time, gold prices fluctuate due to uncertainties; not much due to supply and demand.

Click to enlarge

Source: Minining.com - Freeport-McMoRan Indonesian GOLD mine complex

Introduction:

According to scientists, gold isn't truly formed at least, not on earth; it comes from outer space. 52% of gold is used as jewelry and the rest is used as investments and in industrial applications.

Click to enlarge

Source: numbersleuth.org

According to the report, all of the gold ever mined in the history of humanity amounts to about 152,000 metric tons; some report says 165 tons. It is only about enough to fill 60 trailers. The report further mentions as follows:

Scientists believe that there is still eight times more gold in and under the oceans than has ever been mined close to the planet's surface.

2500 metric tons of gold is mined annually. From 2009 to 2010, India and China were the largest consumer of gold jewelry. India consumed about 746 metric tons, China 428 metric tons and the US about 129 metric tons. Click to enlarge

Source: numbersleuth.org

The below table shows gold jewelry consumption for 2015: India alone consumed about 675 metric tons in 2015; yearly gold production is around 2500 metric tons.

Click to enlarge

Source: Investopedia

Annual Gold Production: In 2005, world gold production amounted to 2,470 metric tons. China is currently leading global gold mining production (490 metric tons in 2015) while Australia is second, producing about 300 metric tons in the same year.

Source: Statista

Chart was Broken:

Based on the chart below, the uptrend line for gold commodity was touched five times, and seemed to be a valid support level but the uptrend line was broken on September 30, 2016. Within two days (October 4 - 6), gold plunged from $1309 to $1249 which is about 4.8%, one of the biggest single-day drops. It doesn't happen very often. The chart warned us on September 30 to be cautious. If anyone went against the chart he or she would have been hurt by the price drop. Below is the one year chart:

Click to enlarge

Source: Tradingview (One-year chart)

Below is the 18-year chart; we can see there is support around $1050.

Click to enlarge

Source: Tradingview

Direxion Daily Gold Miners Bear 3X Shares (NYSEARCA:DUST)

DUST Exchange-Traded Funds (ETFs) designed to seek daily investment results of 300% of the opposite of performance of NYSE Gold Miners index. For example, if the index is down by 2%, DUST will go up by 3 x 2% = 6%. DUST was up about 43% within two days (October 4 - 6) due to gold's fall.

Click to enlarge

Source: Tradingview

Direxion Daily Gold Miners Bull 3X Shares (NYSEARCA:NUGT):

NUGT Exchange-Traded Funds (ETFs) designed to seek daily investment results of 300% of performance of NYSE Gold Miners index. NUGT was down about 52% within two days (October 4 - 6) due to gold's fall.

Click to enlarge

Source: Tradingview

Top 3 Gold Mining Stocks' reaction after Gold Plunge (Oct 4 ~6):

  1. Barrick Gold Corporation USA (NYSE:ABX) was down about 13% (down from $17.38 to $15.38)
  2. Newmont Mining Corp (NYSE:NEM) was down about 13% (down from $38 to $33.6)
  3. AngloGold Ashanti Limited (ADR) (NYSE:AU) was down about 16% (down from $15.7 to $13.5)

How much does it cost to produce one ounce of gold?

Click to enlarge

Source: Barric

Based on the top three gold mining companies' second quarter earnings, they lost money in their second quarters (gold was traded at around $1260).

  1. Barric reported a net loss of -$3.12 per share (non-GAPP performance); all-in-costs of gold per ounce in 2015 was about $900
  2. Anglo reported net loss of -$2.3 per share (non-GAPP performance); all-in-costs of gold per ounce in 2015 was $1001
  3. Goldcorp reported a net loss of -$6.5 per share (non-GAPP performance); all-in-costs of gold per ounce in 2015 was $1038

All-in-costs is still a non-GAPP measure (this excluded impact of impairments).

Click to enlarge

Source: Anglogold

In the current situation, gold production would likely fall or remain flat. Gold production would go up when prices are higher, i.e. greater than $1300.

Gold Mining companies losing money last 13 years:

According to the report, mining companies have not been profitable over this entire 11-year time period. With gold prices plummeting and because of such narrow margins and debt issues, Allied Nevada had to file for Chapter 11 bankruptcy on March 10, 2015.

Supply and Demand and Gold Prices:

Simple economics tells us the following:

  • If supply increases with the same demand - the price will go down.
  • If demand decreases with the same supply - the price will go down.
  • If demand increases with the same supply - the price will go up.
  • If supply decreases with the same demand - the price will go up.

Let me give you an example; if we have a good rain, vegetable production will increase. With the same demand, the vegetable price will go down quickly.

Even though gold demand has increased by 21% for 2016, gold prices are falling. We can see that supply and demand doesn't influence the gold price.

Why does the gold price fluctuate?

Supply and demand is not much of a cause of gold price fluctuation; rather, expansion (economy recovery), recession and other events dictate the gold price. During economic recovery and a strong US dollar, people would leave gold and invest in stocks. The below charts show the factors influencing the gold price.

Year

Gold Prices (London PM Fix)

Dow Closing (Dec 31)

Inflation (Dec YOY)

Factors Influencing Price of Gold

1929

$20.63

248.48

0.6%

Recession.

1930

$20.65

164.58

-6.4%

Deflation.

1931

$17.06

77.90

-9.3%

1932

$20.69

59.93

-10.3%

1933

$26.33

99.90

0.8%

FDR took office.

1934

$34.69

104.04

1.5%

Expansion. Gold Reserve Act.

1935

$34.84

144.13

3.0%

Expansion.

1936

$34.87

179.90

1.4%

Expansion.

1937

$34.79

120.85

2.9%

FDR cut spending.

1938

$34.85

154.76

-2.8%

Contraction until June.

1939

$34.42

150.24

0%

Dust Bowl drought ended.

1940

$33.85

131.13

0.7%

Expansion.

1941

$33.85

110.96

9.9%

U.S. entered WWII.

1942

$33.85

119.40

9.0%

Expansion.

1943

$33.85

135.89

3.0%

Expansion.

1944

$33.85

152.32

2.3%

Bretton-Woods Agreement.

1945

$34.71

192.91

2.2%

Recession following WWII.

1946

$34.71

177.20

18.1%

Expansion.

1947

$34.71

181.16

8.8%

Expansion.

1948

$34.71

177.30

3.0%

Expansion.

1949

$31.69

200.13

-2.1%

Recession.

1950

$34.72

235.41

5.9%

Expansion. Korean War.

1951

$34.72

269.23

6.0%

Expansion.

1952

$34.60

291.90

0.8%

Expansion.

1953

$34.84

280.90

0.7%

Eisenhower takes office. Recession as Korean War ends.

1954

$35.04

404.39

-0.7%

Contraction until May. Dow returns to pre-Depression level.

1955

$35.03

488.40

0.4%

Expansion.

1956

$34.99

499.47

3.0%

Expansion.

1957

$34.95

435.69

2.9%

Expansion until August. Contractionary monetary policy creates recession.

1958

$35.10

583.65

1.8%

Contraction until April.

1959

$35.10

679.36

1.7%

Expansion. Fed raises rate to 4%.

1960

$35.27

615.89

1.4%

Recession. Fed lowers rate to 1.98%.

1961

$35.25

731.14

0.7%

JFK takes office.

1962

$35.23

652.10

1.3%

Expansion. Cuban Missile Crisis.

1963

$35.09

762.95

1.6%

Expansion. LBJ took office.

1964

$35.10

874.13

1.0%

Expansion. James Bond movie Goldfinger released. A criminal intends to control gold prices by nuking Fort Knox.

1965

$35.12

969.26

1.9%

Expansion. Vietnam War. Fed raises rate to 4.32%.

1966

$35.13

785.69

3.5%

Expansion. Fed raises rate to 5.76%.

1967

$34.95

905.11

3.0%

Expansion.

1968

$38.69

943.75

4.7%

Expansion. Fed raises rate to 6%.

1969

$41.09

800.36

6.2%

Nixon took office. Fed raises rate to 9.19%.

1970

$37.44

838.92

5.6%

Recession. Fed lowers rate to 4.9%.

1971

$43.48

890.20

3.3%

Fed lowers rate to 3.5%. Expansion. Fed raises rate to 5%. Wage-price controls.

1972

$63.91

1020.02

3.4%

Expansion. Nixon adjusts the dollar's value relative to gold again.

1973

$106.72

850.86

8.7%

Nixon takes dollar off gold standard in August. Inflation triples. Dollar plummets. Gold skyrockets. Fed doubles rate to 11%, triggering recession.

1974

$183.85

616.24

12.3%

Contraction and stagflation. Fed raises rate to 13%. Nixon resigns in August. Ford takes office. Allows private ownership of monetary gold. Investors sell stocks and buy gold to hedge against inflation.

1975

$139.30

852.41

6.9%

Recession ends when Fed loweres rate to 7.5%. Stocks rise, gold falls.

1976

$133.88

1004.65

4.9%

Expansion. Fed lowers rate to 4.75%.

1977

$160.45

831.17

6.7%

Expansion. Carter takes office. Inflation at 6.7%. Investors buy gold to hedge against inflation.

1978

$207.83

805.01

9.0%

Expansion. Fed raises rate to 10%.

1979

$455.08

838.71

13.3%

Expansion. Fed raises rate to 15.5%, then lowers it to 12%. Confused companies keep prices high.

1980

$594.92

963.99

12.5%

Fed continues stop-go monetary policy, raising rate to 20%, then lowering it to 8%, then reraising it to 20%. Gold hits record high of $850 on January 21 as investors seek safe haven.

1981

$410.09

875.00

8.9%

Reagan takes. Establishes Gold Commission, which rejects return to gold standard. Fed raises rate to 20%. Reduces inflation, creates recession.

1982

$444.30

1,046.54

3.8%

Recession ends with passage of Garn-St. Germain Depository Institutions Act and lower Fed funds rate.

1983

$389.36

1,258.64

3.8%

Expansion. Reagan increases military spending. Stock market soars as inflation is beat.

1984

$320.14

1,211.57

3.9%

Expansion.

1985

$320.81

1,546.67

3.8%

Expansion.

1986

$391.23

1,895.95

1.1%

Expansion. Reagan cut taxes. Stocks soar.

1987

$486.31

1,938.83

4.4%

Expansion. Black Monday stock market crash. Gold spikes.

1988

$418.49

2,168.57

4.4%

Expansion. Fed raises rate to 9.75%.

1989

$409.39

2,753.20

4.6%

S&L Crisis. Fed lowers rate to 8.25% to prevent recession.

1990

$378.16

2,633.66

6.1%

Recession.

1991

$361.06

3,168.83

3.1%

Fed lowers rate to 4%. Recession ends. Gold falls and stocks soar.

1992

$334.80

3,301.11

2.9%

Fed lowers rate to 3%. Expansion.

1993

$383.35

3,754.09

2.7%

Expansion.

1994

$379.29

3,834.44

2.7%

Expansion.

1995

$387.44

5,117.12

2.5%

Expansion.

1996

$369.00

6,448.27

3.3%

Expansion. Investors leave gold and invest in stocks.

1997

$288.74

7,908.25

1.7%

Expansion.

1998

$291.62

9,181.43

1.6%

Expansion.

1999

$282.37

11,497.12

2.7%

Expansion. Y2K scare causes businesses to buy new computers. Creates tech stock bubble.

2000

$274.35

10,786.85

3.4%

Stock market peaks in March. Economic expansion continues. Investors abandon gold.

2001

$276.50

10,021.5

1.6%

Recession aggravated by 9/11.

2002

$347.20

8,341.63

2.4%

Expansion. Investors return to gold. Begins nine-year bull market in gold.

2003

$416.25

10,453.92

1.9%

Expansion.

2004

$435.60

10,783.01

3.3%

Expansion.

2005

$513.00

10,717.50

3.4%

Expansion.

2006

$632.00

12,463.15

2.5%

Expansion.

2007

$833.75

13,264.82

4.1%

Dow peaks at 14,164.43.

2008

$869.75

8,776.39

0.1%

Subprime mortgage defaults and derivatives cause recession.

2009

$1,087.50

10,428.05

2.7%

Recession ends. Gold hits record $1,000/oz on Feb 20.

2010

$1,405.50

11,577.51

1.5%

Worries over budget deficit, Obamacare, and Dodd-Frank send gold up.

2011

$1,531.00

12,217.56

3.0%

Worries over whether the U.S. Congress would raise the debt ceiling sent gold prices to all-time high of$1,895 on Sept 5.

2012

$1,657.60

13,104.14

1.7%

Expansion. Gold falls. Stocks rise.

2013

$1,202.30

16,576.55

1.5%

Expansion. Gold falls. Stocks rise.

2014

$1,154.25

17,823.07

0.8%

Gold falls due to strong dollar.

2015

$1,061.00

17,425.03

0.7%

Gold falls as dollar rises.

Click to enlarge

Source: thebalance.com

US Dollar Strong makes Gold Weak or Vice Versa:

Since gold is traded mainly in US currency, a weaker dollar makes gold less expensive for other nations to purchase. If there is an Increase in the purchasing of gold (demand), gold prices will go up; also, the US dollar starts to lose its value. If US currency is stronger, it would be more expensive for other nations to purchase gold so that the gold price will go down. This is one of the reasons the price of gold is generally inversely related to the value of the US dollar. The below chart shows correlation between USD index and gold commodity (USD stronger means gold is cheaper or vice versa):

Click to enlarge

Source: Market Realist

Conclusion:

Gold will be volatile until the end of this year. There are a lot of uncertainties i.e. possible interest rate hikes or drops, the US election, Brexit, the recession, the oil crisis (low oil price) etc. Because of these events, gold may touch $1050 an ounce which is the second support level in the chart (see above). Once gold breaks the $1200 mark, gold production will be dropped accordingly because gold mining companies would be losing a lot of money. As soon as supply has dropped a lot, there would be a bounce in the gold price. There is a possibility financially-distressed gold mining companies would be bought out or would file for bankruptcy.

Based on my analysis, I recommend gold mining stocks and gold ETFs as a SELL. Be cautious when investing in NUGT, DUST or gold mining stocks. Short position without call option or Long position without put option would be a very dangerous decision.

Additional disclosure: Disclaimer: Investing in stocks is very risky. There is also a possibility that you may lose some or all of your investment if they are not protected by insurance (option). Please do your own due diligence before investing in stocks or ETF. Information provided in this article is informational and should not be the sole guide to determine if investing in the company is appropriate for you. The above are my opinions and should not be the sole purpose for initiating a trade. Also remember to only initiate trades that are within your pre-defined risk parameters.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.