A prediction was made recently by Nouriel Roubini: gold will likely move much lower, towards $1,000 by 2015. The argument is summarized as follows:
1) Global financial crisis led to peak pricing in gold
2) Lack of risk of inflation
3) Gold does not provide any income
4) Positive outlook for US and global economy means real rates will rise
5) Highly indebted governments already have large gold positions, and may sell to reduce debts
6) Hyping by extreme political conservatives absent
There are a number of problems with this argument. First, commercial investors covered their bearish bet in a big way. Hedge positions from producers are at a record low, at 37,571 contracts. Second, inflation could still become a problem if energy prices rise. Even though inflation was below the Fed target in April 2013, it was helped by low oil prices. If Japan and the United States continue their pace of quantitative easing, it could feed higher demand for energy, which will trigger inflation. Finally, lower gold price projections from brokerages like Goldman Sachs, Credit Suisse, and JP Morgan might represent a capitulation in the bearishness for gold. Legendary investor George Soros reportedly sold down his position in the Gold ETF (GLD) by 12%, but he also added a $25 million position in options for Junior Gold Miners (GDXJ). Soros has a $100 million position in Gold Miners (GDX). His total gold-related position totals around $240 million.
If the interest to hold an investment hedge against inflation and world growth is dropping, then investors could look at bonds. On Twitter, Bill Gross said:
So how do you like these apples? Slow global growth, currency wars, tight risk spreads. Put risk assets in your rear view mirror.
Gold Miners Oversold
If Soros is right to shift a bullish position in miners, then investors should look at miners reducing their CapEx (capital expenditure) and their “all in” production costs for gold. These companies include Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM). The monthly return for gold miners varies, with Kinross (KGC) returning the most, and Gold Fields (GFI) down sharply:
All of the gold miners in the chart are down between 14.3% and 51.2% in the last one year period:
No one can truly predict if gold will be $1000 or $2000 in 2015. Investors may only look for companies able to produce positive cash flow as gold prices fluctuate. The miners are actively reducing costs, selling unprofitable minds, and reducing exploration projects in an effort to be profitable. These are the companies investors should consider as part of their portfolio.
Written by Chris Lau