In an earlier article we laid out the case for the importance of annual gold mining production and how it heavily influences the supply picture of physical gold. Gold mining companies have been having a tough time controlling gold costs, and the true all-in costs of an average ounce of gold is now being produced at close the $1300 per ounce. Even with the price of gold averaging more than $1600 per ounce in 2012, total gold production was down for the miners we researched, which encompassed more than 25% of total annual gold production.
Higher premiums are still present from Dubai to Shanghai, U.S. Mint sales have been breaking records, and other mints and refiners are producing gold coins and bars round the clock to meet demand for physical metal. Counterintuitively, the market price of gold has been dropping even as we see the highest amount of physical demand in years.
Gold seems to have formed a bottom, and with such a large short position, we believe gold is just waiting for a catalyst to propel it higher and force a number of shorts to cover in the face of strong physical demand and a tight supply picture. These catalysts are tough to predict, but with such an overwhelmingly negative outlook by hedge funds and paper gold investors (hence the large short positions), news that may normally have little effect on the market may end up being the spark that sets the short-covering blaze. We may see it in the form of the shutdown of the largest gold mine in the world for an extended period.
Seeking Alpha
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