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Gold prices dropped on Thursday due to a discounted interest rate cut from the European Central Bank and the expectation that disappointing economic data out of the United States will follow at the end of the week.
Gold prices were down on Thursday, trading below $1,610 following the ECB’s 0.75 percent interest rate cut and another round of QE by the Bank of England. Spot market gold prices ended the day at $1,604 per ounce in New York, a 0.79 percent drop from Wednesday’s high of $1,623.80.
Investors will be eyeing the US Bureau of Labor‘s June jobs report, released today. The report is expected to reflect how the European crisis is weighing down on the US economy, and will likely indicate whether or not the Federal Reserve should take steps to stimulate economic growth – a move that would be positive for gold. A fresh round of quantitative easing would boost inflation and ratchet down the value of the US dollar, sending investors back into the arms of gold and other precious metals.
Jim Wyckoff, writing for Kitco News, predicted that bullion will rise slightly in the near term, commenting, “[t]echnically, August gold futures bulls and bears are on a level near-term technical playing field but the bulls still have some upside momentum. The gold bulls’ next upside price breakout objective is to produce a close above solid technical resistance at the June high of $1,642.40.”
Nader Naeimi, senior investment strategist with AMP Capital, said that gold prices will have a much better second half. “We are still in an environment with central banks injecting quite a bit of liquidity, and real interest rates are still negative. Until that [trend] changes, I think the fundamental backdrop for gold prices will likely be positive. Gold will be an asset that you buy in weakness, not during the momentum and frenzy.”
Company news
AngloGold Ashanti‘s (NYSE:AU) CEO, Mark Cutifani, is more concerned with Australian tax royalties than the potential nationalization of South African gold production. Though Cutifani noted that construction and mining costs in South Africa have increased by as much as 15 percent this year, creating difficult operating circumstances, Australia’s new taxation policy is more worrisome. Effective from the start of this month, Australian iron and coal mining companies that realize annual profits of more than $75 million will be subject to an additional Minerals Resource Rent Tax of 30 percent. This punishing regulation has already resulted in earnings downgrades for some of Australia’s biggest mining companies, including global top mining producers BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) and Rio Tinto (LSE:RIO,NYSE:RIO,ASX:RIO).
Investors will note that higher taxes and growing positive sentiment toward the nationalization of resources are both contributing to the creation of challenging operating environments for some gold producers. Margins will potentially contract for some gold producers, but relatively strong balance sheets, diversified projects, and geographical risks may provide some downside protection. The key is to be selective in creating a framework to evaluate risks and reconcile them with opportunity cost.
Gold Fields (NYSE:GFI) announced that its Q2 gold production was in the range of 862,000 troy ounces of gold. The estimate falls approximately in line with the 872,000 troy ounces of gold it produced last year. Production saw a 4 percent increase compared to the first quarter.
Junior company news
Samco Gold (TSXV:SGA) announced the completion of the first phase drill program of its principal El Dorado Monserrat project.
Barkerville Gold Mines (TSXV:BGM,FWB:IWUB) announced a NI 43-101 compliant indicated resource estimate for the Gold Quartz open-pit model on Cow Mountain as well as a NI 43-101 compliant estimation of the geological potential of the 6.4 kilometer Island Mountain, Cow Mountain, and Barkerville Mountain trend. This trend is the central portion (where the company has focused its exploration activities) of a larger 67 kilometer trend on the company’s 1,118 square kilometer property.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.