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Gold May Start To Act More Like A Commodity - Deutsche Bank

By Kitco News
Thursday May 22, 2014 8:30 AM

(Kitco News) - As gold trades closer to its marginal cost, the yellow metal may begin to trade more like a commodity that is dependent on factors like supply, demand and cost dynamics, rather than the monetary and macro forces that drove gold in previous years, said a German bank Thursday.

When gold prices traded at a significant premium to its marginal cost, as it did a few years, ago, gold was treated like a currency, said Xiao Fu, strategist at Deutsche Bank, in a research report. That may no longer be the case as the premium now is much narrower.

When measured using the cash cost curve, known as C1 costs, it appears that gold prices are at a 30% premium to marginal costs, about $1,000 an ounce, Fu said. However, using a global gold all-in sustaining cost curve, Fu said gold prices in the 90th percentile are trading at a much smaller premium to marginal costs, which they peg at $1,200 an ounce using sustaining cost curve analysis. As of Thursday, gold prices are trading around $1,300.

“During times of rising prices and high margins, few questioned the suitability of C1 costs as prices tended to rise faster than cost inflation. However, increasingly there are debates about whether the industry should abandon the traditional cost benchmark and adopt new measures to better reflect a more ‘realistic’ level of costs to sustain output,” Fu said.

Cash costs measure mining, processing and administration, inventory movements, waste-stripping and by-product credits, she said. Meanwhile, the all-in sustaining cost curve analysis, an accounting measure created by the World Gold Council, can include capital costs incurred to sustain and maintain existing assets to constantly produce metal.

Those costs also include spending to ensure assets remain productive and to enhance minimum reliability, environmental and safety standards. However, Fu said, the all-in sustaining costs don’t include cash interest expenses, cash taxed or other miscellaneous cash charges, which Fu said could add up to another $100 an ounce, depending on the miner’s leverage.

For purposes of the study, Fu defined all-in sustaining costs as C1 operating costs that are inclusive of mining processing, general and administrative costs and net by-product credits, also royalties, sustaining capital costs, near-mine exploration and evaluation and corporate and administrative expenses.

She said because of cost-cutting at the top end of the cost curve, the differences between the 90th percentile and the 50th percentile have decreased. Fu said historically the 90th percentile on the all-in sustaining cost curve is a better support level for gold.

“We expect that the gold cost curve to flatten further due to ongoing cost-cutting efforts and this could indicate moderately lower support levels in the coming years,” she said.

Using the global gold all-in sustaining cost curve, firms like Barrick, Newmont, Goldcorp are in the middle and lower part of the curve, while Newcrest and Kinross are in the upper quartile of the cost curve, but under the 90th percentile of $1,200, Fu said.

Deutsche Bank also said it remains bearish on the gold price outlook, despite the recent strength this year. “We expect that price weakness will be driven by an acceleration in U.S. growth and a strong turn in the U.S. dollar. This is likely to introduce renewed headwinds in gold prices, although we expect marginal costs could once again provide indicative support levels,” she said.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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