Gold price needs significant fall before producer cutbacks – JP Morgan

Otmane El Rhazi from The Bullion Desk.

The gold price has to fall significantly lower before producers start cutting back, which will come about until the market trades at or below $800 per ounce, investment bank JP Morgan said in a note.

Spot gold is currently trading around five year lows of $1,097.80/1,098.80 per ounce, a $3 increase on the previous day’s close, but remaining under $1,100.

The price decline, said the bank, was most likely started by position covering and accelerated by breaks in technical support levels.

According to the report, yesterday’s closing prompt gold price of $1,107 corresponds to the 76th percentile on the all-in cost curve and the 98th percentile on the cash cost curve.

Production costs have fallen year-on-year, with Wood Mackenzie estimating that the global average cash cost, plus sustaining capital, is $792 this year, against $909 in 2014.

“Moreover, while all-in costs do give a better representation of actual mining costs, in times of distress, all-in costs tend to converge with cash costs as miners generally first cut exploration, development, and maintenance costs before considering production cuts. This means that should prices continually trade lower we think that all-in costs could fall even further, relative to cash costs, and still prefer to look to the cash cost curve to gauge price support levels,” it said.

Meanwhile, the recent move lower in price, combined with the shorter investor positioning, has increased the potential for short- covering gold rallies.

“We estimate that short-covering could likely lead to prices climbing roughly $50 from current levels, yet the market’s tolerance to short positioning remains murky, making predicting the timing of these rallies even more difficult,” it said.

But, there is the question of what could trigger the short-covering in the near-term, as many of the fundamentals skew solidly bearish.

Still, a decline in the  dollar, or greater demand from physical buying in Asia could trigger some short-covering.

Yet, as the price decline was Asia-driven, and  sentiment is broadly bearish, the bank is cautious that Chinese buyers are likely looking for even lower levels now before purchasing.

“Discounting any near-term aggressive short-covering, we now believe that prices could enter a more outright bearish trend in the coming months after staying relatively range-bound last quarter,” it said.

The bank forecast that this year’s third quarter would likely have the weakest average price this year and now forecast an average of $1,150 in this period.

(Editing by Martin Hayes)

 

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