So, the gold rout that we foreshadowed in last week’s column duly happened, and the price dipped briefly below US$1,090 per ounce in Asian trading at the beginning of this week, before consolidating uneasily at the current price of around US$1,100.
So far, so predictable.
What industry-watchers call a “capitulation” is now well and truly underway, and analysts are falling over themselves to forecast further weakness in the face of increased dollar strength and the potential for a rate rise in the US.
A rate rise in the UK is coming too, although that’s only likely to figure as a marginal factor in any serious analysis of future gold price trend, even if London is still clinging on to one of the main price setting mechanisms in the form of the AM and PM fixes.
As with most capitulations, this one is taking place in stages.
Some analysts, notably the good folk at Investec, have pointed out that the more prominent of the London-listed gold equities, Acacia (LON:ACA), Centamin (LON:CEY), and Randgold (LON:RRS), are less burdened by debt than their North American counterparts, and thus have been less vulnerable to the capitulation.
Investors famously exaggerate the effect of the gold price when setting valuations for gold mining equities, pushing them down harder and faster in bear markets and boosting them higher and swifter in bull markets.
But according to the analysis by Investec, at the beginning of this week the gold sector across the pond was crushed even more severely than the gold sector here in the UK, when the gold price shed more than 4% in a single day.
The North Americans look more exposed because their debt levels are higher, and this is borne out on a slightly longer view too.
Thus shares in Canadian champion Goldcorp (TSX:G) have dropped by around 25% in the past couple of weeks, as have shares in the once-mighty US corporation Barrick (NYSE:ABX).
In the UK by contrast, the effect has been slightly less extreme.
Randgold has dropped by just over 10%, Centamin by around 9.5% and Acacia by a slightly higher 15%.
Acacia of course has a North American connection of its own, having been spun out of the now beknighted Barrick a couple of years ago.
But according to Investec it’s not that which accounts for the bigger fall relative to its UK peers.
Rather, it’s simply that Acacia’s costs per ounce of gold production are higher.
And here we are at last getting down to brass tacks.
Because whatever the debt levels may be, these companies will ultimately stand and fall by their ability of their operations to withstand the margin squeeze that lower gold prices are forcing.
Out of a list of eight of the world’s top gold miners, Investec highlights that Acacia has the highest all-in sustaining costs of all the companies, at US$1.117 per ounce.
At the current gold price at the time of writing, US$1,096, Acacia’s operations are breakeven at best.
Barrick’s all-in costs are the next highest, at US$927, followed by AngloGold (JSE:ANG) at US$926 and Goldcorp at US$885.
It will be a while before either Barrick or Goldcorp come under real pressure in terms of costs, although if and when the gold price continues to fall finding the cashflow to service their debts will become harder and harder.
By contrast, Centamin’s all-in costs at US$858 will continue to make the company look viable even in the event of further sustained weakness, while Investec’s estimate of Randgold’s costs, at US$850, provide equal reassurance.
The lowest cost producer of all the gold majors, however, is Newcrest (ASX:NCM), which produces its gold at an all-in cost of just US$745 per ounce.
Its shares have dropped by just 9% over the past couple of weeks, making it one of the better performers in relative terms.
These are not good times in the gold sector, and capitulation is underway. But at least for now that capitulation is being conducted in an orderly and rational fashion.