UBS has today released research asking the question: how low can gold go?
Gold has fallen $125/oz since the Fed signalled a potential wind down of its QE stimulus last week. Since the start of the 2013, the gold price in US$ is now down 26.9%. The fall in the A$ against the US$ means that in A$ terms the gold price fall has been less precipitous and is now 17.9% below its 1 January level of A$1608/oz (Chart 1).
Across the globe, gold ETF holdings are now down to 71.7Moz, a fall of 19.3% from the 1 January 2013 high of 88.9Moz (Chart 2).
Sentiment to the metal has also been negatively hit by recent changes to Indian regulations on gold imports and concerns over a potential Chinese ‘credit crunch’ – reducing demand from gold’s two largest physical markets.
In our note from 21 February 2013, we suggested that should the important support level of $1535/oz be broken then the price could test the 50% Fibonacci retracement level of $1300/oz. Unfortunately, this has occurred. We now focus on the potential for the gold price to test the next retracement level – the 61.8% retracement at $1155/oz (Chart 3).
Should the $1155/oz level not hold, then the next potential support level at $975/oz reflects the 76.4% retracement. From an equities perspective, this does not bear thinking about. Based on our analysis, at the current gold price of $1225/oz, approximately 11.2Moz of global production (circa 15%) is uneconomic on a C3 cost basis. At a gold price of $975/oz, we estimate approximately 28.6Moz (circa 40%) of global mine production would be uneconomic.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
