As it is: the Precious Metals Market Predicament
A few concerns that have become prominent in association with the gold market over the last 24 months will without doubt continue to play its hand right through 2016 with the first being the strong U.S. dollar which has placed an enormous amount of pressure on the prices of the precious metal. This is because, most of the demand for the precious metal stems from foreign markets and based on the fact that most currencies have weakened against the dollar the price of gold in their respective local currencies is not as low as it is relative to the dollar.
For example, if we take a currency that has depreciated by 15 % against the dollar, and gold prices have dropped by only 10 %, gold would in fact be more expensive than it previously was for that particular currency. Countries that trade closely with the direction of primary commodities such as crude oil and gold (Canada, Australia etc), gold prices have actually increased as far as they are concerned. The second concern related to the precious metals market is the current trend by governments with regards to tighter monetary policies such as the Federal Reserve’s increase in the Fed Funds rate after a decade which makes the capital market much more attractive to investors due to the higher returns that it has to offer despite the rest of the world gripping on to their seats that the Feds would decrease the speed of the rate hike installations that it has planned.
The fact however remains, that even the slightest increases have a significant impact on the precious metals market due to the leverage that gold traders use being added to the significantly higher finance costs that follow suit as interest rates rise. This would not be the end of it as low gold prices have also effectively placed most precious metals mining companies in dire straits financially as production costs are higher than the revenue capable of being generated with current prices per ounce. Not many companies have a positive cash flow and most have negative current ratios whereby their current assets are below their current liabilities leaving these companies in at the threshold of insolvency.
Many have opted for stream-based financing which could end up either way, on one hand they continue their mining activities to stay afloat and prevent mine closures and advocate supply which pushes prices even lower whilst moving into streaming contracts that would give them financial incentives that lead to better long term prospects. Gold miners who are in better financial positions have also resorted to restricting output in order give the market a boost towards recovery and higher prices. If we look at the precious metals market from early on in the year gold has lost more than 40% of its value which is in fact a good deal for bargain hunters as they seek to pick the bottom in the market.
What is crucial at this point and cannot be undermined is the fact that gold prices rose for slightly more than a decade before reversing course, and this is very likely to happen again in the opposite direction. However, when this will happen is anybody’s guess.