From the SMH:
Motley Fool’s Mike King has taken a look at the gold sector and he reckons there is some money to be made.
Supply of gold is 6 per cent lower than a year ago as miners closed high cost goldmines and optimised other operations to reduce costs – even if it means lower production. At the current price many goldmines are unprofitable or breaking even and supply is likely to fall further, putting more upward pressure on the gold price.
You want to buy goldminers when the price has fallen to the point at which it is almost unprofitable to mine for more gold. At that price, new mine expansion is unlikely, keeping supply in check.
Only the very low cost gold projects, such as Beadell Resources’ (ASX: BDR) Tucano mine in Brazil, with a cash cost of $640 in the first half of this year, will ramp up production or expand. But there are not many similar low cost goldmines around the world, and the trend is for rising gold production costs, as it becomes more difficult to find and then higher cost to mine, which suggests a positive long-term outlook for gold.
I’ve never been enamored of supply arguments for gold investment. Investment demand for a non-yielding, safe haven asset is based upon such calculus only in the most tenuous way. Far more important is whether buy and hold investors have an investment case that projects increasing intrinsic value. For gold that is simply its role as the undollar, a foil for the US currency, which is turn the result of the stability of fiscal and monetary settings.
The failure to rally in the past week is therefore pretty bearish.
Even so, there is an argument for gold appreciation at the moment, very much along the lines of that which I put as a risk to Australian growth in the next year or so:
In short, one possible outcome of the negotiations is increased US austerity for the 2014 year. That is a nasty risk for Australia. It’s not the impacts on US growth directly that matter so much as it is the impacts upon US monetary settings. Increased US austerity will almost certainly result in a cancelled taper of monetary policy. That, in turn, will fire up a renewed round of “risk on” capital allocations, the US dollar will come under pressure once more and commodity currencies will find themselves rising on revitalised hot money flows.
But I still see this as s risk rather than a central case. As such I see the argument in favour of gold expressed by the chaps at the Fool as wrong-headed and the actual case as speculative.
