Ventura: Is it time to buy Gold?
According to Ventura with the average cost to produce an ounce of gold holding near USD 1,200, billions of dollars in mining assets are experiencing write-offs and this takes away most of the incentive to produce. Eventually, this will eat into supply prospects, and long-term reductions would ultimately lead to bullish price changes.
July 09, 2013 / 14:55 IST
Ventura's special report on gold
How much does it really cost to produce Gold?Rising costs and the drop in gold prices in first quarter have already put some gold miners in the uncomfortable position of having to consider hedging production.When prices dipped to the USD 1,320s area, it started to come close the marginal cost of production plus sustaining capital expenditures, called all-in costs. Estimates of those costs range between USD 1,200 and USD 1,300.So on average, how much did it cost in total to dig up an ounce of gold? The answer is it depends on companies mining in different region of the world. Mining in Canada is much more cost efficient than mining in South America.The cost of an oz of gold is comprises of all the bills paid for: Exploration, Mine development and Administration.But according to Thomson Reuters' Gold Fields Mineral Services division recently reported the average cost to mine an ounce of gold was USD 1,150 in 2012.After seeing gold prices plummet in 2013 and with gold miners battling high operating costs, gold companies find themselves with razor thin profit margins with the ounces they're pulling out of the ground. The cost to mine and produce an ounce of gold, on average, ranges from USD 1,100 to USD 1,250. Some mines produce gold at a very affordable cost while others are now producing gold at costs that are higher than the metal is valued.Gold may be set to nearly double from current levels, but it didn't drop in a straight line and it won't return to its previous highs in a straight line, either. As explained above that most of the miners will find it hard to sustain the mining at current levels where the prices have already breached the cost of production.Some miners may hold - depending on their cash flow situation - some production and inventory for a while just to see what happens, .We are into that territory now that we will be starting to see a lot of marginal production from a lot of the smaller miners.Miners will start to close down some of the more costly mines, spend less on exploration and invest less in general. We have seen that whenever prices go below cost, producers will normally cut production until prices recover. Therefore, the breakeven point is good support for an asset's price. Additionally, investors should notice that production of gold is actually dropping. In 2012(25.6 million ounces) of gold were mined compared to (26.3 million) in 2011, a 3 percent drop in production. Even as miners are experiencing higher costs the amount of gold production is dropping, which means that gold is becoming much harder to find and more expensive to mine.We think that somewhere along the line the gold prices will simply start rising, because production will reduce supply significantly. Gold prices should start to stabilize once there's a significant reduction in supply as miners cut back.Gold's rout since April has been magnified more in last week of June with bullion on track to record its worst quarter since at least 1968 on ongoing worries about the tapering of quantitative easing by the U.S. Federal Reserve. It fell to a three-year low of USD 1,180.48 June 2013.But this fall in the price of gold is not truly based on supply and demand - It's based on expectations of what the Federal Reserve is doing, not even Bernanke and all the paper Gold ETFs in the world will be able to do much to suppress gold prices from reaching their fair value when gold production hits a standstill, and when demands, especially by China & India, is still in the hundreds of tons each year.Possible Bullish Scenarios
While these factors are dominant, there are scenarios where the paradigm could shift. With the average cost to produce an ounce of gold holding near USD 1,200, billions of dollars in mining assets are experiencing write-offs and this takes away most of the incentive to produce. Eventually, this will eat into supply prospects, and long-term reductions would ultimately lead to bullish price changes.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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