Investors have sold off the metal, which is down about 10 per cent for the year, on fear that higher US interest rates would dent the appeal of bullion as it does not pay interest.Other precious metals have also been hit by the strength in the dollar and the slump in gold, and were headed for sharp annual declines.
“On Monday on the Comex market in New York, gold futures with February delivery dates jumped higher on the back of safe haven buying amid a global stock market rout and worries about escalating tensions in the Middle East,” Mining.com reported on the day.
“Gold was exchanging hands for US$1,074.20 an ounce, up US$13.90 or 1.3 per cent compared to Thursday's close,” it added.
“Anticipation that the US Federal Reserve will raise rates from near zero where they have been since December 2008, prompted large futures speculators or ‘managed money’ investors such as hedge funds to dramatically raise bearish bets on the metal, dumping more than 150,000 lots or the equivalent of some 425 tonnes of gold since November.
Spot gold edged up 0.2 per cent to US$1,062.50 an ounce on Thursday last week. Volumes were thin ahead of the New Year holiday on Friday.It slid to a nearly six-year low of US$1,045.85 earlier in December.
"Next year (2016) too gold will be lower as US interest rates will keep going higher," said a bullion trader in Hong Kong in a yearend report, adding that this would put pressure on other precious metals as well.
Gold could drop to $1,000 or below but could recover slightly in the second half of the year, he said. If that happens, Tanzania will be among countries which will be hurt by the development.
The current slump has not only affected the country’s foreign exchange earnings but also led to shedding of jobs by major gold producers in the country. Top miner Acacia Mining has already cut over 1,000 jobs and more could be retrenched this year if market conditions remain turbulent.
The company, which operates three mines in the country, has also trimmed salaries of top executives with CEO Brad Gordon sacrificing 10 per cent of his package. In April 2015, his salary was increased to nearly US$1.6 million (about 3.5bn/-) annually.
Gold prices dropped from US$1,800 per ounce three years ago to less than US$1,100 per ounce during the September quarter. According to The Economy Forecast Agency, the maximum price for the precious metal in early January 2016 will be US$1,075 an ounce and the minimum US$1,013.
The predicted average price for the whole month is US$1,046. The slump caused liquidity and cash flow problems to Acacia last year.
“At the end of June, after our debt obligations, we had US$145 million in cash. At the end the September quarter we had consumed US$46 million of that cash which left us with US$99 million remaining,” Gordon said in a last year alert to the company’s staff.
“If the rate of decline continues our business is not sustainable; this will have a significant impact on our people and the communities in which we operate,” he added noting that there were two sides to the challenge.
“The first is that our production is below our plans – we now expect this year’s (2015) production to be the same as last year’s 719koz. At the beginning of the year we expected to produce up to 80koz or 10 per cent more than that.
“The second is that having brought our total costs down over 2013 and 2014, with total spend for our operations and offices in 2014 of US$767 million, we are seeing our costs increase again and project this year’s (2015) total costs to increase to almost US$800 million.
“With similar production and a lower gold price this is clearly not sustainable. For our business to survive and prosper, based on our current mine plans we must bring those total costs down by close to 10 per centin 2016 to below US$730 million,” he noted.
On December 3, the company announced at the London Stock Exchange (LSE) where it is listed that it would take several measures to enhance cash flow generation within the organization. Over the past two years, Acacia has been undertaking a process to drive productivity and cash flow across the company.
According to the LSE statement, the miner has implemented significant improvements to its mine plans, including the mechanisation of the Bulyanhulu mine and the move from open pit to underground mining at the Gokona pit at North Mara. Alongside a formal cost saving programme, these changes have led to a reduction in its costs of about 30 per cent from their peak in 2012.
As part of this process, the statement said, there has been an ongoing programme to ensure that the workforce is of the appropriate size and mix for our operations. This process, initially scheduled to continue through to the end of 2016, has already led to a 60 per cent reduction in the number of higher-cost expatriates. Following a further review of the organisation in light of the current gold price and recent performance, Acacia has accelerated the process of organisational change, it added.
“As a result, approximately 1,050 of our people, representing approximately 27 per cent of our workforce, have either left or are expected to leave Acacia over the next few months through a combination of voluntary separation agreements and redundancies.
“The largest proportion of the role reductions are at Bulyanhulu, but all of our mines and offices will be affected. As part of this process Acacia has fulfilled all local legislative requirements and is committed to minimising any employee hardship; as such we have put in place support services to assist those affected.”
The statement has it that Acacia was also working to further refine capital expenditure, renew discussions with contractors and major suppliers to improve their rates, rationalise corporate administration spend and ensure its community spending was in line with the company’s corporate strategy and delivering sustainable development.
The company also announced that further details on the expected impact of the restructuring and other initiatives, along with full year guidance, will be provided with fourth quarter production results in January 2016.
“The restructuring, which is expected to lead to an annual saving of US$25 million, prior to a restructuring charge of approximately US$11 million predominantly incurred in 2015, is one of a number of initiatives underway to ensure costs within the business are optimised, in turn enhancing cash flow generation even in a low gold price environment,” the statement reads in part.
Sectoral watchers say the outlook for all metal does not look bullish heading into the new year. Gold prices have been influenced a great deal by US monetary policy. The Federal Reserve increased US interest rates for the first time in nearly a decade in December, and is expected to raise rates at a gradual pace in 2016.
That could support the dollar, which is on track to gain nine per cent this year against a basket of major currencies. A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.
"The pace of increasing interest rates is going to be slow but still that would depress gold prices," said Mark To, head of research at Hong Kong’s Wing Fung Financial Group.
Physical demand in top consumers China and India would not be strong enough to support a price rally, he said.Other fundamentals were also not supportive of an uptick in prices. Assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, are near a seven-year low, while short positions on Comex gold contracts are close to a record high.
A bearish outlook for oil could pile more pressure on gold.Gold is positively correlated to oil as the metal is often seen as a hedge against oil-led inflation.
Among other precious metals, silver looked set to end the year down about 11 per cent. Platinum was headed for a 27 per cent decline, its worst annual performance since 2008.
With a 31 per cent drop, palladium was the worst performer among the precious metals.
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