Lower Gold Price Outlook On Moody’s Debt View

Moody's Investors Service (MCO) said Wednesday it has reduced its 2014 forecast for average gold price from $1,200 to $1,100/Oz and from $20 to $18/Oz for silver.

The announcement doesn’t come as a surprise, as most investment and bullion banks predictions for the precious metals prices this year don't vary much in that they predict a decline.

The rating agency said the new prices would be used as a baseline approximation when analyzing the credit condition of gold and silver producers. The downside gold price is now $900/oz (revised from $1,000/oz) while silver’s is $15/oz (revised from $17/oz).

ABX Chart

ABX data by YCharts

Perhaps more than any other assets, gold depends on investors’ faith on it. They drive the price of bullion depending on how much or how little they buy and sell bars, coins or bullion-backed exchange traded funds. This is not the case in other commodities, where speculators generally avoid owning physical supplies.

Analysts, such as Moody’s, keep trying to provide logical explanations for gold’s moves:

Operating costs for gold producers increased significantly over the past several years as mining companies chased new production in response to rising prices. Costs rose, in part, as producers mined lower-grade ore (which is economic to mine at higher prices), but producers also saw significant increases in other key cost inputs, including wages, power, consumables, exploration, environmental spending requirements and government royalties. Including sustaining capital expenditure requirements, Moody's believes the rated-industry's all-in average cost of gold production is currently at least $1,100/oz comprised of about $850/oz of cash operating costs and a minimum of $250/oz of sustaining capital costs.

The agency, however, has some positive observations to share. It says that, while the industry's retreat from growth will inevitably cause production to fall, it will also yield benefits, such as making equipment less expensive and consumables more readily available. In addition, the US dollar appreciation against currencies in major gold producing countries has been benefiting local production costs while the sale of non-core assets or other capital raising events could give a boost to the liquidity of certain producers.

Moody’s rates most of the largest gold producers including Barrick Gold (ABX), Newmont Mining (NEM), AngloGold Ashanti (AU), Goldcorp (GG) and Kinross (KGC). Barrick and AngloGold are already on a negative outlook from the agency.

ABX Total Long Term Debt (Quarterly) Chart

ABX Total Long Term Debt (Quarterly) data by YCharts

(YCharts note: Despite its recent challenges, YCharts Pro's Barrick Rating on the company's fundamentals rates it strong overall. The value score is low, however, and YCharts doesn't assign an overall score at this point.)

Gold prices dropped in London today, extending the previous session's loses, as upbeat US jobs data made the dollar climb and boosted the appeal of cyclical assets such as stocks at bullion's expense.

Cecilia Jamasmie, a contributing editor at YCharts, is an editor at MINING.com. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company News  gold   mining   

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