After bouncing back from their six-year lows, gold miner exchange traded funds could find trouble gaining a foothold on their climb back up as production costs remain mostly above current spot prices.
The Market Vectors Gold Miners ETF (NYSEArca: GDX) has surged 19.3% off its November 5 low. GDX, though, is still down 9.2% year-to-date.
Nick Holland, chief executive officer of Gold Fields Ltd. (NYSE: GFI), argues that the gold miner industry will experience greater writedowns next year as producers’ break-even point remains higher than current bullion prices, reports Kevin Crowley for Bloomberg.
Specifically, Holland points out that the industry average maintains a cost of about $1,300 per ounce, including debt payments.
In comparison, COMEX gold futures are currently hovering around $1,191.5 per ounce. The SPDR Gold Shares (NYSEArca: GLD), the largest physically backed gold ETF, is down 2.1% year-to-date. Gold prices h ave declined as traders try to time the Federal Reserve’s rate outlook while an improving U.S. economy and market diminished demand for safe-haven precious metals. [Gold ETFs Waver Ahead of Uncertain Swiss Vote]
“The industry by and large is under water,” Holland said in the article. “I would expect further writedowns. Production I think will be curtailed but it will take some time to filter through the system.”
During gold rally when prices hit a peak of $1,921.17 per ounce in September 2011, gold miners have been borrowing to fuel a quick expansion and more acquisitions. However, firms are now forced to adjust to the new reality of lower bullion prices.
Miners also extracted about 559,000 ounces of gold over the third quarter, up 2%, compared to the previous three months.
GDX includes a 2.7% position in Gold Fields Ltd. Holland calculates that the company has a break-even price of about $1,909 per ounce including debt repayments.
Among chart watchers, some technicians, though, are betting on a turnaround in gold miners stocks after the sector touched new lows earlier this month, providing a cheap valuation play. [A Bold, Gutsy Call on Gold Miners ETFs]
Market Vectors Gold Miners ETF
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