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Why Gold Prices Are Not Getting Support from Miners’ Cost Curve

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Currency weakness and lower energy prices

Commodity currencies such as the Australian dollar, New Zealand dollar, and Canadian dollar are weakening against the US dollar. They are trading at multiyear lows against US dollar.

These countries produce commodities like oil, iron ore, and coal, and the commodity weakness is weighing negatively on the trade terms for these countries. This led the currencies to lose against the US dollar. Separately, the strength of the US dollar due to Fed rate hike expectations and relatively better US economic conditions is also leading to relative weakness in these currencies.

In addition to the support from weaker local currencies, gold miners also benefit from lower energy prices (USO). The WTI (or West Texas Intermediate) prices have fallen by 14% year-to-date.

Reduction in these costs is positive for the gold miners. Newmont Mining’s (NEM) management mentioned during its 2Q15 earnings call that its costs benefited from favorable movements in the exchange rates and energy prices during the quarter.

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Improving productivity

Gold miners are also reducing costs through productivity and efficiency improvements. Barrick Gold (ABX) is changing mining methods, optimizing maintenance, and improving its supply chain to achieve productivity-related gains from its operations. Its AISC (all-in sustaining costs) to produce gold in 2Q15 totaled $895 per ounce compared to $927 per ounce in 1Q15.

Goldcorp (GG) also reported a strong reduction in AISC for 2Q15. Its AISC came in at $846 per ounce, compared with $885 per ounce in 1Q15 and $852 in 2Q14. Goldcorp forms 7.20% of the market Vectors Gold Miners Index’s (GDX) holdings.

Lower support price for gold

We’ve also seen a similar response in iron ore and coal industries. Miners cut down on costs and increased volumes in response to lower prices, which led to an overall lowering of the industry cost curve. Similarly, the overall cost curve for gold miners is declining, which means lower support price for gold.

Because gold miners are leaving no stone unturned to further reduce their costs, it could mean an even lower support price for gold going forward, presenting a potential downside for gold prices.

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