Sentiment has not been helped by Goldman, Credit Suisse and Société Générale, all recently declaring the gold bull market as over.
The major ETF providers are understandably not having any of this argument, saying it’s the action of a limited part of the ETF investment community made up of hedge funds and short-term players. Long-term players will keep the faith and the exodus will abate soon.
There could be some truth in that, as Brent Cook, an exploration analyst, told the audience at the California Resource Investment Conference in late February.
At the beginning of the millennium, the average per-ounce cost to mine gold was $300. Now, the average cost is about $1,500 an ounce.
Just to maintain current global production at about 80 million ounces will require US$400 billion in capital expenditure, while ore grades are dwindling to below 1 gram per ton. New viable mines are few and far between, yet mining costs are relentlessly rising. This alone will provide a floor to prices in the medium term.
This assumes, of course, that physical demand continues at current levels. Bears would point to the outflows from ETFs to suggest it will not, bulls will point to strong jewelry demand and the appetite of central banks, particularly emerging market central banks to holding physical gold, as key long-term sources of demand.
The answer, though, probably lies as much in global GDP as anything else. Much of the shift has come from investors moving from risk-off safe haven hedges against currency debasement and financial crisis to risk-on enthusiasm for equities.
If GDP growth does not live up to expectations this year and next, gold at sub-$1,500 per ounce may look like it has some legs after all.