247Bull.com Editor: Thanks to rising capital expenses gold producers are running into cash flow problems that are likely to result in decreased production and higher gold prices in the years ahead. Rather than investing in new exploration projects in order to maintain future production, many gold miners are cutting costs and switching production to higher grade resources. As Gerald Panneton, a former executive at Barrick who is now the CEO of Detour Gold Corp. explains, “The mining industry has lost a lot of appeal, because of poor guidance, poor delivery, over-promising, cost overruns”. Panneton believes that the business model of the global gold miner with 15+ mines “is not a model that is sustainable” in this environment. As Rick Rule, the founder of Global Resource Investments and Sprott Asset Management USA Inc., has said many times, “the cure for low prices is low prices”.
The dollar gold price hovered just below $1610 an ounce Thursday morning, while stocks and commodities fell along with Euro as disappointing economic data was added to news that Cyprus’s banks will remain closed until next Tuesday.
“We forecast the gold price to have dropped to below $1400 by year-end and for it to continue to trend lower next year,” says a note from Societe Generale.
SocGen has cut its average gold price forecast for this year to $1500 an ounce, with the per ounce averages for 2014 and 2015 cut to $1400 and $1300 respectively.
Commerzbank by contrast continues to see record gold prices ahead, but has also cut its 2013 forecast.
“[We] expect the price to rise to only $1800 per troy ounce by year-end [and] we now believe the price target of $2000 per troy ounce we previously forecast for the end of this year will only be reached in the course of next year,” the bank says.
Gold in Sterling meantime edged lower this morning, dipping below £1060 an ounce as the Pound gained against the Dollar following stronger-than-expected UK retail sales data. A day earlier, the US Federal Reserve left interest rates on hold at its latest meeting and confirmed it will continue with $85 billion a month of quantitative easing asset purchases.
Gold in Euros rose towards €1250 an ounce but failed to breach that level before easing back, as the Euro dipped briefly below $1.29.
Cyprus must agree a bailout plan by Monday, the European Central Bank said today, or else the ECB will cut off emergency liquidity funding to the island’s banks.
“Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks,” says a statement from the ECB’s Governing Council.
Russian president Dmitry Medvedev meantime has told European Commission officials that any solution to the Cypriot crisis should be found “with the participation of all interested parties, including Russian structures”.
The original EU-IMF bailout proposal included levies on deposits with Cypriot banks, many of which have been made by Russian nationals. Cypriot lawmakers rejected the idea of levies in a parliamentary vote held Tuesday.
“It is now up to the Cypriot authorities to come up with proposals,” Jeroen Dijsselbloem, head of the Eurogroup of single currency finance ministers, told the European Parliament Thursday.
Elsewhere in Europe, the Euro fell against the Dollar this morning after preliminary purchasing managers’ index data indicated economic conditions in the Eurozone have diminished by more than expected this month.
For the Eurozone as a whole, PMIs show contraction in both service and manufacturing sectors. German manufacturing has also declined, the flash PMI indicates, while service sector growth has slowed. The consensus forecast among analysts was for both German measures to rise slightly.
Over in India, the world’s biggest gold buying nation, demand for gold could rise for the first time in three years this year despite the government raising gold import duties to 6%, according to Somasundaram P.R., managing director at the World Gold Council for India.
One of India’s biggest gold lending firms meantime has seen its share price drop by a third this week after it said the fall in the gold price in recent years means the value of collateral may not be sufficient to cover interest owed on all loans.
Silver meantime traded sideways this morning at just below $29 an ounce.
Demand for silver “may be curbed” following the bankruptcy this week of China’s Suntech Power Holdings, the world’s biggest solar panel maker, according to a note from HSBC.
“The solar panel industry is burdened by overcapacity,” HSBC says.
“We estimate silver demand from the solar panel industry represents roughly 10% of silver industrial demand.”
A campaign in Switzerland aimed at preventing the sale of gold by the central bank has received enough signatures to force a referendum.
Politicians in Arizona meantime have proposed legislation that would make gold and silver coins legal tender, Bloomberg reports.
Ben Traynor | BullionVault