Drop in gold puts squeeze on miners

Gold continues to hover around five-year lows as sellers react to the strengthening US dollar and relatively benign inflation pressure.

Global spot gold prices are down 8.8% on a year ago and 10.5% down during the past six months, trading about $US1064 ($NZ1612) yesterday, up slightly from last Friday's five-year low of $US1056.20.

The price bodes ill for miners who have not planned to slash their cost of production.

Craigs Investment Partners broker Peter McIntyre said the US dollar was strengthening and investor expectations were US interest rates will begin to rise from the current 0-1% range, where they have been for the past seven years since the global financial crisis.

''With stability returning to the banking and finance sectors, fears have been allayed,'' Mr McIntyre said.

This was in spite of the recent euro-zone immigration problems and heightened risks of terrorism, in the wake of the Paris attacks, he said.

It had been helpful global sharemarkets have been relatively calm, and the inflation environments also benign, which meant holding gold as a hedge against inflation was not attractive at present, Mr McIntyre said.

His gold outlook expects a little strengthening but during calendar 2016 for the price to range from $US1107 mid-year to $US1092 by about December next year.

''Hard commodities and precious metals have all been weak and struggling,'' he said.

He said of seven companies researched, in 2014 the all-in sustaining costs to produce an ounce of gold was driven down by 12%, with a further 5% savings expected during calendar 2015.

''The spotlight is on gold-mining companies which have high cost structures.

''This will put the fear of God in those companies,'' he said of the five-year price lows.

From an investor's point of view, it was the low-cost producers that should be targeted, Mr McIntyre said.

Craigs have maintained ''buy' recommendation on ''top picks'' Oceana Gold, Evolution Mining, Alacer Gold and Independence Group.

A 2015 increase of 4% in gold sold had also assisted companies to keep costs down, he said. Maintaining further cost-cutting during 2016 appeared unlikely, with all-in sustaining costs to rise by 12%, as production growth stagnated and costs again began to rise.

However, the higher gold price in Australian dollar terms meant exploration was back in focus, with exploration spending set to rise by 25% in 2016.

Although last Friday's fall to a five-year low provided some pain for New Zealand and Australian miners, the rising US dollar has been affecting both the strength of the Australian and Kiwi dollars, easing the impact.

Investors have been selling gold holdings in recent weeks in anticipation the US Federal Reserve will raise interest rates for the first time since 2006.

US Federal Reserve officials signalled in late October they would use their December 15-16 policy-setting meeting to review whether the US economy has recovered enough to warrant tighter monetary policy.

Australian website Business Spectator said many North American investors expected gold to struggle once rates climbed as it did not pay interest and cost money to hold.

''There's a total vacuum of buying in this market,'' Bill O'Neill, co-founder of commodities investment company Logic Advisors, said.

''I don't think we're at the bottom here. And as I look ahead for the rest of the year, there really isn't any reason to say there's going to be some dramatic change [in direction],'' he said.

- Additional reporting: nzresources.com.

simon.hartley@odt.co.nz

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