© Bernard Dahdah
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Following the recent news, the price drops have already been factored by the market. Potentially, we could see a further decline in prices that could reach the break-even point of gold, but this would be in a longer term perspective. QE, in our view, has been the most important factor in driving the price of gold since the beginning of the financial crisis, which started five years ago. Actually, there are some others issues that we have been following closely in the gold market since the beginning of the economic slump– demand from India, China, ETPs and the world central banks. Therefore, I suppose after Bernanke's statement we will see price of gold dropping more, if the officials actually apply what they are pledging and go on with the curbs.
Some experts have predicted that gold will continue its downtrend to $1,100 in a year and possibly a decline toward $1,000 by 2015. Do you also expect such a substantial fall in gold prices throughout next two years?
When we are trying to predict how far the price of gold can drop, we have to look at the average cost of gold's production. Obviously, the price of gold cannot decline for a long period below the average cost of production globally. Currently we estimate that the average cost of extracting gold is a little bit below $1,000 an ounce. With regards to the year 2015, it is hard to predict as inflation will probably go up, various costs will increase as well. However, even though I strongly doubt that gold will reach or even fall below $1,000 an ounce in 2015, for the current year we would not be surprised if the price did in fact reach $1,100.
We saw a 12-year bull run in gold, which ended last year. What a long term-trend we might observe in the future, especially when the global economy shows more signs of a stable improvement?
In the long term, throughout next three years, it would not come as a surprise if gold began to continuously drop. I do not see gold rising again, and the reason for that is a steady improvement in the global economy. Historically, before the financial crisis, when there were normal economic cycles, investment demand for gold was just 8% of total demand. Since the onset of the financial crisis the share of this investment demand has reached 29%. On top of that, we have to also take into account central banks' demand. Prior to the financial crisis monetary authorities were the main source of gold supply and since the financial meltdown their demand for gold has been equivalent to 8% of total demand for gold. However, once the global situation improves and go back to normal averages, the main concern would be what source of demand will be able to replace the investment demand, when it drops from 29% to 8%, and when the demand from developing countries vanishes. We are quite concerned in the long term that with these record levels of gold supply from gold mining companies and with a substantial decrease in demand from investors and central banks, we might face an imbalance. Thus, the price will drop to allow the market to re-equilibrate.