What’s next for gold depends on what gold miners decide to do next.
The industry was not prepared for a 22% drop in gold prices this year and company shares have been absolutely battered. Take Barrick Gold — the world’s largest gold producer. Today the company announced an $8.6 billion writedown (the company’s market cap is only $17B) and cut its dividend to 5-cents from 20-cents. Shares of the company are down 52% this year.
The upshot for gold prices is that if the biggest company is in pain, its smaller competitors are in agony. If producers shut down to conserve cash, supply will tighten.
The downside is that producers could begin to hedge, which would put downward pressure on gold futures. Barrick and many others were unhedged through the gold rally because investors preferred to be levered toward physical prices. From an executive point of view, it makes sense to hedge if you’re getting close to break-even cost because it keeps you in business and helps you to continue developing projects so I believe that’s more likely.
So it’s a question of hedge or shutdown and gold prices are in the balance.
