Gold margins getting squeezed

Published: 26 June, 2013 11:30

Gold margins decreasing June 2013
Barrick Gold Corp. announced this week that it will lay off approximately a third of its corporate staff in Toronto, which follows the news earlier in the month that Newmont Mining Corp. will divest a similar proportion of its 750-strong Colorado workforce.

Clearly, the gold miners are having their margins squeezed, and future production will likely wane if the commodity continues to fall in price.

In tandem with reduced output, gold producers are also less likely to sell forward in order to hedge exposure, thus reducing at least one source of future selling pressure.

Gold has hit multi-year lows this week, when priced in terms of oil. The ratio of gold price to a barrel of West Texas Intermediate Crude (WTIC) has hit levels last seen in 2011, before gold’s record price spike to over $1,900 per troy ounce.

This ratio is important for mined supply, since a large proportion of the production cost is directly attributable to the energy used to extract the metal. History shows, however, that the gold price can dip well below the mean per-ounce production cost for extended periods of time, so this kind of fundamental analysis needs to be treated with caution.

On the bearish side for gold, China appears to have narrowly averted a Lehman-like banking liquidity crunch over the past few days, yet gold’s safety trade has not appeared, and the precious metal has failed to rally.

In fact, online trading in gold this week has been range bound, with support being continually tested around $1,272 and overhead resistance now building at $1,300 per troy ounce.

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