Why Gold Is Nearing Its Bottom

The hits just keep coming for gold. As markets finally calmed after Bernanke’s announcement of imminent tapering from the Fed, gold continues to get slaughtered. With many predicting the metal to eventually lose its grip on the quadruple digit levels, investors are trying to properly time the bottom. The problem is, a number of gold’s movements have seemed to defy all logic with harsh sell-offs coming off of little fundamental news or changes; emotional trading has taken hold [for more gold news and analysis subscribe to our free newsletter].

But there may be a way for buyers to properly time the bottom, as the supply side of the equation is nearing a dangerous level.

All Eyes on South Africa

At one point in time, South Africa was second to none when it came to gold production. Though the nation’s annual output has since declined, South Africa still accounts for a significant portion of global supply and it is believed that approximately 50% of the world’s gold reserves lie within its borders.

The mining industry has long been a key component of South Africa’s economy, as the resource-rich nation has plenty to offer multinational firms. Gold is no exception to this fact, as a number of the world’s largest mining firms have significant stakes in South African operations. But with gold prices continuing to drop, miners are nearing dangerous levels as costs could soon outweigh the actual spot price of the precious metal [see also 50 Ways To Invest In Gold].

Gold MinerHere is the cost breakdown per ounce of gold mined for some of the largest producers currently operating in South Africa:

  • Barrick Gold (ABX): $919/oz.
  • Sibanye: $1,334/oz.
  • Harmony (HMY): $1,220/oz.
  • AngloGold (AU): $1,204/oz.

As these costs display, some companies already have their heads underwater, with others nearing critical points. On top of all of this, mining workers and unions have been battling to have wages doubled as South Africa has long dealt with controversy over fair wages for workers.

“Anything below $1,400 an ounce is sort of a red line. There’s a vast difference between what labor unions are demanding and what South African mines can afford. It points towards long drawn out negotiations that could end in dispute” says David Davis, a Johnnesburg analyst at SBG Securities. The threat of a production halt may finally help gold find a comfortable bottom, as this is not the first time South Africa has dominated a precious metal market.

The Platinum Case for Gold

First thing’s first, South Africa is a much more significant player in the platinum world, accounting for about 75% of annual production as well as holding 95% of known global reserves. Still, the recent mining strikes that have hit platinum prices hard could very well be an indicator of what is to come for gold prices [see also Jim Rogers: The Gold Correction Is Not Over].

Though the effect will not be as pronounced on gold prices, South African mining strikes have jolted the price of platinum on many occasions, as a supply glut has forced the white metal higher. Though the nation will not be able to impact gold nearly as much, producers may soon be forced to cut production as costs continue to rise. If that happens, the supply for gold will take a sizable hit, giving prices some relief from their current slide.

Timing the bottom based on these figures is certainly tough, but it is easy to see that at a certain point, South African production will have to take a hit. Should this happen, gold will likely find a comfortable resting point, or even jump in the short term. Keep a close eye on some of these large producers and South Africa in the coming weeks, as they may hold the key for stopping gold’s slide.

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Disclosure: No positions at time of writing.

This entry was posted in Asset Allocation, Commodity Producers, Gold, Precious Metals and tagged , , , . Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

One Response to “Why Gold Is Nearing Its Bottom”

  1. [...] fear that the super-cycle may be nearing its end. But while a number of high profile commodities, like gold, had a tough time this year, there were others that persisted. Below, we outline three commodities [...]

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