Gold fever. It ain’t what it used to be!

Producers Removing Hedges

In 2007, most gold producers (E.g. Newmont, Barrick etc) removed their gold hedges in anticipation of a rise in gold prices, which came true in the last quarter of 2007, witnessing a substantial increase in gold prices, although top-line gains of these companies were affected and offset by higher operating costs, still the highest operating cost was around $400-500 per ounce which still leaves a decent margin on a price of $800 gold.

Production more difficult, limited supply and consolidation underway

Since the depletion of gold mines is more rapid then the other conventional mining assets like base metals, Gold producers are constantly pushed to acquire new assets. Although prices remained elevated, key producers remain under huge pressure to increase reserves and lower production costs. It should be noted that in most cases there has been no new discovery of precious or base metals, the reserves were lying there for years, just uneconomical to produce because of the low prices.(refer table/charts below.)

Gold fever. It isn’t what it used to be!

We look back on the last time gold hit $850 (1980) with even gold teeth going into the melting pot. Not this time though, as many feel the metal has much further to go yet on its upward path. The hype and hoopla that accompanied gold’s record-breaking rise the last time around is probably missing this time partly because although there is plenty of risk around, including high oil prices, there is little 1970s-style doom saying.

Though the price of gold seems very high today, the record $850 an ounce it hit at the London fixing on January 21, 1980, translates in today’s money to more than $2,150 and therefore we can say that we are comfortable at these levels (inflation adjusted).
(Refer to for more details)

If that’s the case, why is gold falling now?

The only reason gold peaked recently ($918/ounce), coming back to $880 levels, is a result of current scenario in which the market for gold-specific factors that have been acting unfavorably. There have been two price drivers have become less supportive.

First, central bank selling has picked up for some parts of the world, and second, speculation is underway.

Having said that; a strong recovery in physical demand (particularly from India & China) and positive external drivers outweigh the two gold specific factors for now. Hence in our view the gold prices are likely to maintain their upward momentum in the months ahead.

More room for upside

We anticipate that gold prices will continue to increase on account of a weak U.S. dollar and concerns about inflation. Gold is up approximately 30% for the year, with a year-to-date average price of $760 per ounce. Notably the 5-yr return on gold was a total of 140%. We expect a weak global economic growth, increase in inflation fears, a flight to quality for safe haven and other market concerns with the broader economy which will in turn support for higher gold prices. Historically it has been seen, that a US FED easing cycle results in money flowing into commodities especially oil ( gold) and precious metals.

Some of the charts to support the thesis:

World Consumption Pattern


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