NEW YORK (ResourceInvestor.com) -- Today's gold price fall below $420 per ounce tugged the aggregate value of related equity stocks under $100 billion for the first time since June last year when gold traded below $400. So far, this marks almost half a year of losses that, up to today, amount to almost $40 billion.
That $40 billion is more as than the entire global gold and silver sector was worth in early 2001 when metal prices bottomed.
Precious metal investors have been taking a beating since late last year. Now they must confront the fact that the US dollar index has staged a clear breakout above 85. Related to that, the gold price suffered a double bottom break down on Friday after crossing below $425/oz, and more weakness now seems probable.
This was underscored by ongoing liquidation of speculative positions in gold, though silver positions increased nominally. The latest Commitment of Traders Report showed an 85 tonne reduction in the net long position to 250t (80,378 contracts) by last Tuesday. It remains a historically high position though and has only declined to levels last seen in early March.
Equity valuations have also tumbled with recoverable reserves per reserve ounce trading below $140/oz for the first time since July 2004. On another back-of-the-envelope valuation metric shows an even steeper decline which may be a harbinger of lower gold prices. With the world's gold and silver stocks currently worth about $97 billion altogether, it would require a little less than 7,200 tonnes of gold (231moz) to buy all those equities.
That is the lowest "purchase price" since July 2003 when gold cost less than $360/oz.
The most recent high came in October 2004 when it required 9,294t to buy $127bn worth of gold and silver equities at a gold price of $425/oz. The highest value in the present bull cycle was in November 2003 when a gold price of $398/oz required 9,665 tonnes to buy stocks worth $124 billion.
Valuations per reserve ounce remain quite robust with lower aggregate reserves offset by growing appreciation for the scarcity of easily permittable and economic reserve ounces. With environmentalists in high dudgeon, more projects than ever before are facing orchestrated opposition that bridges developed and emerging markets.
Construction and input cost inflation have also raised extraction costs tremendously in the past 18 months, putting many once promising projects at risk.
Consequently, the price of ounces in hand, especially those covered by positive feasibility studies, has appreciated in value.
Overall, there is not yet reason to be so pessimistic as to believe that the larger bear channel the dollar is in has been breached, and likewise for the larger bull channel that gold prices have been travelling in for four years.
The dollar also appears to be benefiting from some switching out of the euro which has lost some allure on Europe's inability to back up its currency with adequate economic growth. However, that does not negate the dollar's problems which have been underscored by the recent cameo performance of private sector unfunded pension liabilities. Corporate lobbyists are now attempting to roll those obligations into another government entitlement which will kibosh all prospect for meaningful Social Security reform.
A stronger dollar might be seen as an opportunity for Asian countries to sell the currency in search of diversified reserves.
The test for equities will come this summer. Some professionals have confirmed to us that they have laid in bids below the waterline in expectation of a traditional late summer rally.
