Will Gold Ever Get its Shine Back?

After hitting a fresh all-time nominal high in 2011, gold remains stuck in a downward trend that appears to be picking up speed. The precious metal has enjoyed twelve consecutive years of positive gains, but is now unloved by almost the entire market.

The heavy selling pressure seen in April has been followed with even more selling pressure in June. On Wednesday, the price of gold dropped $45 on large volume, while silver plunged nearly $1. Both precious metals closed at their worst levels since August 2010. The SPDR Gold Trust – the most popular exchange-traded gold product – saw its holdings fall to the lowest level since February 2009 as investors rushed for the exits.

The recent decline has been magnified by the Federal Reserve, and its Federal Open Market Committee statement that said downside risks for the economy and labor market “diminished” this year. Last week, Fed Chairman Ben Bernanke even claimed during a press conference that the central bank could begin “tapering” bond purchases later this year, and end quantitative easing programs by mid-2014 if economic projections are met. Since those comments, gold has declined about $150.

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Major financial institutions across the board have cut price estimates. Due to China growth concerns and taper talks, Credit Suisse reduced its forecast for the average price of gold this year to $1,400 per ounce, down from $1,580. Silver was also cut from $28.50 to $24.20 per ounce. The bank believes the “fear/safe-haven bid from a majority of western investors has fallen away, and is unlikely to return soon.”

Goldman Sachs, which made headlines in April for slashing its price targets shortly before gold posted its worst one-day percentage drop since 1980, cut its targets once again earlier this week. Goldman now expects the precious metal to end this year at $1,300 per ounce, down from its prior estimate of $1,450. The bank estimates gold will end 2014 at $1,050 per ounce.

Goldman explained, “Medium term, we expect that gold prices will decline further given our U.S. economists’ forecast for improving economic activity and a less accommodative monetary policy stance. Further, with quantitative easing tapering likely to start soon, perhaps even a bit sooner than previously anticipated, we are fast forwarding on our real rate path.” It also added, “Importantly, we continue to expect that continued central bank gold buying will not be sufficient to offset this decline in prices.”

With gold and silver prices reaching new multi-year lows, concerns are starting to rise about miners shutting down production. Mining costs are not falling as fast as bullion prices, and small operations are beginning to struggle with making a profit. Estimates vary, but mining an ounce of gold can cost between $1,100 and $1,300. A reduction in supply is ultimately bullish as it will eventually provide some support to bullion prices.

Sunil Kashyap from Scotia Moccata told CNBC, “At these levels now we are getting very close to the cost of production for a lot of marginal mines. So, it is dangerous in terms of any further decline is going to see product shutdowns. We are coming close to the end of the decline because anything below $1,250 per ounce, you will start hearing about people shutting down mines because they cannot make it enough profit.”

Even large miners are feeling the pain. Barrick Gold, the world’s largest gold producer, plans to cut around 100 office jobs, according to Bloomberg. The reduction represents as much as 30 percent of the company’s total corporate office positions. A spokesman said the move is “part of ongoing efforts to streamline the organization and manage costs in a challenging business environment.” Shares of Barrick Gold are down nearly 60 percent year-to-date.

Despite the recent price movement, nothing goes down forever. Some companies and countries see a bright future for gold. Deutsche Bank recently opened its second largest gold storage facility in the world in Singapore — a small Southeast Asian city-state. The facility is capable of holding up to 200 tonnes of gold in order to meet rising demand from wealthy investors that prefer having direct access to physical bullion.

Singapore is already one of the biggest financial hubs in the world, and removed a sales tax on gold last year to boost its share in the global gold market to 10-15 percent, compared to the current 2 percent. JPMorgan Chase – America’s largest bank by assets – also has a new facility in Singapore.

A market consists of buyers and sellers. While it may seem like everyone is selling gold, there is someone on the other end of the trade buying. For example, gold premiums doubled in India this week as demand continues to surge amid declining prices. Meanwhile, billionaire investor Jim Rogers admitted he bought a “little bit” of gold on Wednesday.

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Disclosure: Long EXK, AG, HL, PHYS