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Gold prices near cost of production, $1,000/oz may offer medium term support

Consensus emerging on future price of gold is that it will hit $1,000 - how soon is the topic of intense discussion among gold traders.

Aviral Gupta   Mumbai     Last Updated: December 9, 2015  | 16:48 IST

Aviral Gupta, Investment Strategist
On September 6, 2011 gold prices hit the all-time high of $1,921.50 per ounce and since then it has crashed by about 56 per cent to currently trade at $1,074 level. In the current calendar year itself, gold prices have depreciated by almost 10 per cent. Much of the fall is attributed to impending interest rate hike from near zero by the Fed, in which case gold loses its attractiveness not only as a non-interest bearing asset but also due to strengthening of the dollar, which makes dollar denominated commodities expensive. Higher rates tend to drag on non-interest-paying gold by increasing the opportunity cost of holding the metal, while boosting the dollar. The other reasons of the fall in gold prices are consumption driven, mainly consumption demand from key consumers China and India due to economic slowdown.

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Consensus emerging on future price of gold is that it will hit $1,000 - how soon is the topic of intense discussion among gold traders. ABN Amro and National Australia Bank last week said that gold will drop to $1,000 in the coming months. Goldman Sachs said in November it expected gold to hit $1,000 in 12 months.

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However, the data from COMEX indicates that it may hit the level much sooner than expected. Put option positions tied to the $1,000 strike price for the most active February COMEX gold futures have jumped over 200 per cent from the beginning of November to 6,950 lots as of December 7. They have risen by 1,600 lots in the last two sessions alone, likely after Friday's robust US nonfarm payrolls data that strengthened the case for a rate hike. Put positions for the $975 strike have increased nearly 10 times since the beginning of last month to Monday. To be noted that bullish call options have also increased during the same period, but bearish put options at $1,000 strongly outnumber the call options. The options expire on January 26, indicating traders expect prices to slip towards those levels by then.

On analysing the famed SPDR Gold Trust (ETF), its holding has fallen from peak of 1,353 tonnes to 634.63 tonnes as of December 7, with investors aggressively cutting back on their gold exposure.

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However, $1,000 as price of the gold may just prove to be medium term floor because global industry average of all in sustaining cost of mining gold is at $850-900. In case of breach of those levels, support may come from sharp cutback in supply. Interestingly, no major cut back has come about till now, which may be worth writing about.

(The author is an investment strategist)

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