Treasure Chest | Oct 07 2013
By Greg Peel
The gold price descended from US$1700/oz at the beginning of 2013 to 1200 in June, before rebounding to 1400 in August. Recent months have brought significant volatility as first the US has discussed QE tapering and more recently the budget, with the debt ceiling next on the list. While the underlying US dollar has weakened over the period, gold failed to kick on from June and has trended back to the 1300 level since, notwithstanding a few wild sessions.
Fed tapering is the most powerful potential driver of gold at present. The failure of the Fed to announce tapering in September as the market expected has provided a reprieve, and with the US shutdown now dragging on GDP the central bank may yet need to push its commencement out further. It has become increasingly less likely Ben Bernanke will preside over the unprecedented policy he introduced in 2009. Further delay should be negative for the US dollar and thus positive for gold, but gold has not exactly kicked on recently as a result.
One day the Fed will begin its tapering. By rights the US dollar should then rally and gold fall.
Citi’s global equities analysts remain bearish on gold and silver. They are thus bearish on goldminer stocks, believing the gold price peaked in 2011 (over 1900) and a bear market has since been established. That bear market is not over, Citi suggests, and the recent rebound in price has just about run its course.
Aside from price, Citi is bearish goldminer stocks for a second reason. The last time the gold price soared as it did in the noughties was in the seventies, and after the bust in 1980 the share prices of goldminers contracted sharply. Citi does not believe global gold stocks have fallen far enough yet to match that previous experience.
The analysts believe some 98% of global goldminers is currently burning cash on an all-in costs basis. Companies are failing to cut their capex programs, exploration programs and corporate costs quickly enough, Citi contends, to keep pace with the 12% fall in gold price. The broker has begun downgrading ratings on global stocks under coverage.
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