The gold collapse might just be the defining economic story of the first half of 2013. We’ve taken a look at several different aspects of the price adjustment, including the hedge funds yielding big returns, and John Paulson‘s loss of $1 billion of his own money, but Bank of America Corp (NYSE:BAC) analysts are looking at something else: the effect of the drop on gold mining companies.
Ben Graham Lecture Notes
I recently stumbled across two precious resources about the Godfather of value investing, Ben Graham. The first resource is a collection of notes from Benjamin Graham’s lectures when he was a professor at Columbia University. The notes were taken during lectures given in 1946, six years after the 1940 version of "Security Analysis" was published. Read More
According to the new report, if the price of gold drops to $1000 per ounce, half of the global gold mining industry becomes worthless. Highly leveraged gold companies, include Sibanye Gold Ltd (NYSE:SBGL), and Wits Basin Precious Minerals, Inc. (PINK:WITM), are in for a tough time if prices fall any more.
A defensive investment in the gold industry can be seen in Range Resources Ltd (LON:RRL) (ASX:RRS) because of a low cost base. Other reasonable investments include companies in the Australian gold market, like Alacer Gold Corp – CDI (ASX:AQG), and Perseus Mining Limited (ASX:PRU), who have a strong buffer to a fall in gold prices.
There is, however, a silver lining to the drop in gold prices. International jewellery demand should rise given the lower price point. The Bank of America Corp (NYSE:BAC) analysts think that international jewellery demand should support a gold price of around $1500, albeit later on this decade. Right now the analysts see little likelihood of a drop below $1200.
The reason for this is the changing face of the gold market. Estimates suggest that in 2016, investors would only need to buy 600 tonnes of gold per year. In 2013, investors would need to buy almost 1800 tonnes to achieve the same price. The international gold market is changing and it’s all down to emerging markets.
The gold market is shifting more and more toward the use of gold for commercial reasons. In 2016, the Bank of America Corp (NYSE:BAC) analysts think that the price of the metal could sit above $1500 even if investors are, as a whole, selling gold. That marks a positive for investors looking to hold the metal long, but it makes the market more susceptible to shocks.
The bulge in gold demand over the next few years will come from jewellery markets in emerging markets, particularly in India and China. If China delivers on the economic crisis its been promising, gold prices could come in much lower than this prediction suggests.
A fall in the price of gold is certainly hurting the gold mining industry, but this is a short term trend right now. At the current price, most of the industry is doing alright. If the price drops any more, however, there will be trouble with $1000/oz spelling disaster for the global mining industry.