Just counting the major currency blocs, the world managed to survive only 36 hours—count ‘em—without a big quantitative easing program somewhere in the world. The Federal Reserve stopped buying bonds on Wednesday, October 29. The Japanese began buying more yen on the following Friday.
All of which, logically, ought to be hopeful news for those who are long on the one currency that cannot be printed ad infinitum—namely, gold.
Less than a month ago, the world’s oldest currency seemed in near free fall. The price per ounce, nearly $1,400 at one point in the spring, had slumped to around $1,150. Money management friends who are gold bulls, and who own the metal in their portfolios, tell me they are getting a lot of capitulative pressure from clients. Some are walking. Others are threatening to do so.
So far gold has picked up about $50 an ounce, standing at just under $1,200.
Is that it? Has it bottomed out? Is it upward from here?
It takes two points of view to make a market, and as gold generates no cash flow, it is impossible to value by traditional means.
Yet here are three points which may be material to anyone considering owning some gold in their own portfolios.
First, while technically the metal can fetch any price, at current levels a great deal of the world’s gold mining is becoming uneconomic. Bellwether gold mining giant Newmont NEM, +4.87% for example, says its average “sustaining” or fully accounted ongoing costs of production are about $1,150 per ounce. Other miners’ costs are similar. Research from Bank of America Merrill Lynch says the range for most of the industry is between $900 and $1,200 an ounce. So if gold stays below $1,200 for long, production will eventually tail off. If gold falls below $900 and stays there, production would presumably dry up almost completely.
This doesn’t include production by nonpublic companies, such as gold mines within Communist China and so forth.
Logically this ought to imply price resistance below $1,200.
Second, gold only looks like it’s in a rout depending on where you are sitting.