Gold prices have fallen dramatically in recent months, and the industry as a whole could be in trouble. In fact, if the prices fall as low as $1,000 per ounce, half the industry could be worth absolutely nothing. Hedge funds have apparently lost their interest in gold, starting in the fourth quarter of last year. Last year was the 12th consecutive year of increases for gold prices, although at this point, gold equities are at historically low valuations.
Analysts at Bank of America Merrill Lynch ran a few price scenarios to examine the risks and whether there are any upsides to investing in gold right now. They also examined some of the largest gold companies in the world to see where they believe the best gold investments might lie.
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
In a report issued to investors on Monday, the analysts said if gold prices continue to fall, then Sibanye Gold Ltd. “would have the most leverage to those falling prices.” They said if gold falls to $1,400 per ounce, they don’t see much discounted cash flow value for the company because of “the high cost nature of its assets.” In other words, the company could be in big trouble if gold falls that low.
In a downside scenario, the analysts said Randgold Resources Ltd (LON:RRS) remains “attractive,” even on prices of $1,400 per ounce. They said the company’s “low cost operations and rising grade profile” will give it a leg up on the competition. In fact, they believe that it will outperform its peers even if gold prices keep falling.
BAML analysts also looked at gold prices from a North American point of view, and they said that low cost products and royalty / streaming companies like Franco-Nevada Corporation (NYSE:FNV) (TSE:FNV), Randgold Resources Ltd (LON:RRS) and Silver Wheaton Corp. (NYSE:SLW) (TSE:SLW) have less sensitivity to prices. The analysts said every $200 per ounce change in gold prices impacts the net present value of the companies by approximately 10 percent.
The Australian gold companies they believe are the “most protected” are Regis and Newcrest. The analysts said companies like Saracen, which are high cost and development companies, will “fare worst” as prices fall.
At this point they believe that about half of the coverage industry will be net present value breakeven if gold prices should fall to $1,000 per ounce. However, other companies, like Sibanye, will have zero net present value even before that point. The analysts found that Sibanye’s net present value will fall to zero at $1,400 per ounce.
The analysts say they remain cautious on gold prices currently.