The plunging gold price has slashed margins for miners around the world, making 10 per cent of production now uneconomical.
Overnight gold dropped to its lowest point in five years, marking the tenth straight day of losses and the worst period of depreciation since 1996.
The price fell down to US$1087.10 per ounce last night, prompting many analysts to state that the metal has lost its lustre.
“We believe gold has lost its safe haven bid. It has instead become primarily a source of cash in hard times,” Robert P. Ryan, from the Bank Credit Analyst of Montreal, told Bloomberg.
This is due to the shorting of gold and news from the US Federal Reserve that the Central Bank will raise interest rates in the country before the year is out; the first time it has done so since 2006.
This in turn heightens the likelihood of people holding gold as the metal is providing little to no yield, causing a price decline.
Added to this is the recent announcement of an apparent 57 per cent increase in the Chinese central bank’s gold reserves.
This recent downwards movement is the beginning of a trend of the metal, with Goldman Sachs expecting worse to come, with an eventual drop below the US$1000 per ounce watermark.
“The risks are clearly skewed to the downside in this environment,” Jeffery Currie, Goldman’s New York-based head of commodities research, told Bloomberg.
“There is a probability that the market trades below $1,000 this year given our broader commodity view.”
This was echoed by Victor Thianpiriya from ANZ, who expects the value of the precious metal will continue to fall.
"Gold is going to struggle in an environment where you have a rising US dollar and rising interest rates," Thianpiriya said.
This bearish position on the metal’s future is set to wreak havoc on miners themselves.
According to a Wood Mackenzie report, taking in gold’s current price and gold mining margins the state for gold miners is grim.
“Wood Mackenzie data suggest these price levels put approximately 10 per cent of gold miners in loss-making territory on a Total Cash Cost plus Sustaining Capex (TCPS) basis,” the firm said.
Thomson Reuters is even more pessimistic on margins, stating that around three quarters of producing gold miners were already in the red when the price hovered around the US$1100 per ounce level.
And this current storm is reportedly one almost entirely of gold miners’ own making.
Gold miners, however, aggressively pursued production growth and hedged significant portions of their production at relatively low gold prices effectively missing large portions of the gold market bull run, Wood Mackenzie explained.
"Furthermore, the quest for production growth – especially in the latter portions of the bull market – meant that many gold miners developed increasingly marginal projects and paid excessive premiums for acquisition-driven production growth through the extensive use of debt and highly dilutive equity financing,” Dr Ryan Cochrane, Wood Mackenzie's senior research analyst, added.
"The reality was that many companies were chasing production without focusing on their costs as prices were still too high to support this action, but while the price of gold increased gold stocks themselves underperformed massively," Grant Thornton analyst Brock Mackenzie told Australian Mining.
"Interest rate hikes and a generally bearish metal price outlook are likely to outweigh short-term mining cost savings made possible by the stronger dollar, the lower prices of key input commodities and active steps by management such as high grading," Cochrane said.
"Furthermore, most of the current projects in the gold mining pipeline were evaluated on the basis of prices above US$1200 per ounce and the fall in prices to US$1100 per ounce will result in a significant cut in future supply. We estimate that nearly 40 per cent of project production capability is uneconomic at current prices.
"With major gold miners struggling to replace reserves, production may begin to decline and higher prices will be required to justify the next round of large capital expenditures.”
However, looking further ahead this fall could strengthen the market, with Mackenzie earlier explaining to Australian Mining that “2015 will be the peak in world gold production, so every year after that there will be less gold produced, which will have a positive effect on the price".