Gold could dip as low as $US900: economist

The price of gold has fallen 26 per cent in 6 months sending the industry into a frenzy and critics to announce that the gold bubble has burst.

Since hitting highs of $US1900 an ounce in September, gold prices have tumbled to below $US1400 an ounce, with many predicting this is only the start of further decreases.

Neil Charnock, an economist at leading gold investment and trading company Gold Oz has predicted the price of gold will drop further as the market faces what he calls a ‘correction’ phase that is expected to last for at least 12 months.

“My gold targets are at around US$1100 and possibly as low as US$900 with a major influence of a strong USD over this correction period,” he told Australian Mining.

Charnock said the temporary falling prices will be met with a sharp rally as prices hit record highs again, but that in the meantime continuing falls are set to ‘cause havoc’ to Australia’s gold mining industry.

“We are in a major correction that will most likely last another 12 to 18 months,” he said.

“This is a blow for Australian GDP and the gold industry here in Australia.

“Many companies will struggle to make a profit so jobs will be lost, merger and acquisition to come along with cost cutting.”

The slump in prices has already seen major players in the Australian market shed jobs and review their mines viability.

Gold miner Newcrest has sacked 150 workers and is currently undertaking a review of its higher cost mines.

Newcrest said it is reviewing its business activities and has paused studies on a number of long-term projects.

"With its major projects ramping up and the more challenging external environment, Newcrest continues to review all of its business activities, particularly those related to higher cost current or future production,'' the company said.

Such a significant gold price drop may mean Newcrest could struggle to match last year’s record profit of $1.2 billion.

Moving forward the company said it expected “progressively lower cash costs” in the future.

Meanwhile, Tanami gold have put their Kimberley-based Coyote mine into care and maintenance.

The Coyote mine and processing plant will now enter care and maintenance while a development decision for the company’s 1.04 million ounce Groundrush project has also been deferred.

As part of a wide restructure of the company, Tanami said it would broaden feasibility studies at its Kavanagh deposit "to investigate the options and cost to further upgrade the mineral resource".

The Coyote project was one of the State's highest-cost producers, pouring gold at basic costs of $1220/oz during the December quarter.

According to data released last week by WA Chamber of Minerals and Energy the average cost of gold production in WA mines has more than doubled in the past six years from $511/oz in 2007 to at least $1100/oz now.

Junior miner Focus Minerals has announced plans to halt operations at its Laverton Gold project as rising costs were making the project unprofitable.

Focus chairman Don Taig said the tough economic climate meant Laverton had to be closed down in order to protect its assets.

 “We have a significant, highly prospective landholding in the Laverton region surrounding four major mines with over 20Moz between them. We are not about to deplete our current reserves base just to break even,” he said.

Taig said improvements to the business had not been enough to keep up with rising costs, and he painted a dim outlook for the sector unless stakeholders were able to work together to introduce new practices.

“The high cost base in the Australian mining industry and rising mining inflation of the past few years has seen all of the reductions and operational improvements we have been delivering continue to be consumed,” he said.

 “A sharp fall in commodity prices always provides a clear lens for the industry on just how bad this has become.

Charnock said that as the world’s financial imbalances are not resolved and that the dipping prices is part of 'the correction we had to have'.

While investors regularly turn to gold as a refuge in times of economic downturn, the metal can also act as a risky asset.

The gold sell-off seen in recent weeks comes as weak economic confidence is driven by a wider move from commodities in general.

Ole Hansen, Saxo Bank’s head of commodity strategy said investors in gold ETFs (exchange-traded funds) are exiting, while hedge funds are short-selling the metal – effectively betting the price will fall, The Telegraph reported.

“Sentiment is really frail and, interestingly enough, this is happening over a few weeks when we are seeing economic data that could, in other circumstances, be supportive to gold,” he explained.

Charnock flagged that while some producers would suffer, other more established miners would rally through the downturn.

“A few low cost and well financed gold companies will benefit from this correction and maintain growth and profit,” he said.

“There are a few companies that are producing who have lots of money and will sit on their gold when it spikes that low.”

Charnock said the industry was full of quality players and expects miners with good grade ores and cash reserves to pull through.

“The Australian gold industry players are tough and have done a great job in a rising cost environment in recent years.

“We have a quality gold industry and they are working hard.”

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