Could Gold Production Peak In 2015 As Exploration Spending Drops?

Strengths

Gold jumped the most in two months on Wednesday topping $1,200 an ounce. The move came on the back of a report showing U.S. employers added 189,000 jobs in March, disappointing expectations of 225,000. This was the smallest gain in employment since January 2014, helping gold to end a three-session slump.

Chinese gold flows, as represented by withdrawals from the Shanghai Gold Exchange, will hit record levels for the first quarter of the year. Year-to-date withdrawals stood at 561.2 tonnes as of March 20. If this is indicative of the rest of the year, gold flows could reach 2,300 tonnes or more in 2015, a new record.

India’s gold imports jumped to 70 tonnes in March as wholesalers, manufacturers and jewelers replenished stockpiles in the run up to April’s Akshaya Tritiya festival. In other news, the Perth Mint said that sale of gold coins and minted bars rose to 34,260 ounces in March, up from 31,981 ounces the previous month.

Weaknesses

U.S. exchange-traded products backed by precious metals lost $1.5 billion in March. Janet Yellen’s signal that the Federal Reserve is in no hurry to raise U.S. interest rates failed to allure investors back to gold. Additionally, spot gold fell for a second month in March leading to a decline of slightly more than $1 for the first quarter.

Hedge funds are betting that gold’s recent rally won’t last and are holding a record short wager that prices will decline. Short holdings rose for a seventh straight week to 84,022 contracts, the highest since the data began in 2006.

Gold Fields gave its top executives a pay raise of 21 percent in 2014. The news came on the heels of what are expected to be difficult wage negotiations in April with labor unions in South Africa.

Opportunities

A recent forecast by Goldman Sachs shows that 2015 will be the year when gold production peaks. This coincides with a 20-year development cycle from peak discovery, implying that there are only 20 years of known mineable gold reserves. Note how exploration spending has soared in the last five years but yielded few new discoveries. With exploration spending now in freefall, this should bode very well for future acquisitions for companies that are have already made a great discovery. Such companies include Pretium Resources, Eastmain Resources, Integra Gold, Roxgold and others which we own in the World Precious Minerals Fund (UNWPX).

According to Standard Chartered and Bank of America, gold will likely advance in 2015 even as the Federal Reserve raises interest rates, snapping two straight years of declines. The two banks forecast the price of gold to average between $1,300 and $1,320 per ounce in the final quarter of the year.

Metals Focus, a precious metals consultancy, predicted that 2015 could mark the end of the bear cycle for gold as demand looks “broadly balanced.” The group said a clearer turning point is becoming visible in 2016 as gold’s supply and demand fundamentals adjust to the new price reality and provide a more stable foundation.

Threats

Metals Focus qualified its 2015 prediction on gold by stating that the outlook for higher U.S. interest rates and a stronger U.S. dollar could push bullion down to as low as $1,080 per ounce.

Deutsche Bank sees gold remaining relatively supported into the second quarter, but is looking for a new phase of weakness to emerge as soon as the Federal Reserve starts to tighten monetary policy. Countering this, UBS says there is no longer the same firepower behind a move lower for gold, adding that any downside from here could well be contained.

Goldman Sachs earned back its place as the largest bank by commodities revenue as competitors including JPMorgan Chase scaled down or abandoned the raw materials business. However, Fed Governor Daniel Tarullo questioned whether Goldman Sachs should be allowed to own physical commodities, as the practice exposes the company to risks outside of traditional banking.

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