Commodities & Metals

Moody's Lowers Downside Targets to $900 on Gold and $15 on Silver

If a prediction from Moody’s Investors Service turns out to be true, gold and silver are going to have a bad year. Moody’s reduced its forward views for the average prices of gold and silver in 2014 and beyond. This could have another negative impact on the SPDR Gold Shares (NYSEMKT: GLD), but it could be a boon for the DB Gold Short ETN (NYSEMKT: DGZ).

Moody’s sent its average per-ounce price of gold down to $1,100 from $1,200, and the average per-ounce price of silver was reduced to $18 from $20 previously. The ratings agency’s price target previously offered were deemed over a time period of “over the next couple of years.”

What is more important than the average price here is the downside price targets. This was lowered to $900 per ounce from $1,000 for gold. Silver’s downside price target was lowered to $15 per ounce from $17 previously. Again, these are the downside price targets rather than the average price targets.

We would warn readers that the iShares Silver Trust (NYSEMKT: SLV) is now less than $1 above the 52-week low. After a drop of $0.11 to $18.72 on Thursday, the 52-week range is $17.75 to $31.41.

The lower price expectations are based on significant deterioration in the spot price of gold and silver and on fundamentals that seem unfavorable over the next couple of years. Some headwinds include forward momentum in the global economy, the unwinding of various government stimulus programs and the subdued threat of inflation in most major economies.

Moody’s had previously indicated that it could lower its forward view if the price of gold was to persist below $1,300 per ounce. This is really bad news for gold and silver companies involved in mining and production. Moody’s said that the key credit metrics of certain producers are stretched for current ratings in the absence of mitigation through cost reductions or other actions.

Moody’s also said that it plans to evaluate the impact of lower gold and silver prices for each company over the coming months. A key issue was that operating costs for gold producers increased significantly over the past several years with companies chasing new production because of higher prices. Mining lower-grade ore came at the same time as wage hikes, higher power costs, higher exploration costs, higher environmental spending and other factors.

Here is the real rub for gold miners and producers. It said, “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.”

Moody’s showed that this review was regarding gold and silver companies such as AngloGold Ashanti Ltd. (NYSE: AU), Barrick Gold Corp. (NYSE: ABX), Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), Goldcorp Inc. (NYSE: GG), Hecla Mining Co. (NYSE: HL) and others in the sector.

Almost all investors know the SPDR Gold Shares (NYSEMKT: GLD) as the largest gold exchange-traded product out there, but the DB Gold Short ETN (NYSEMKT: DGZ) is the short bet as it aims for the inverse of the daily performance of the Deutsche Bank Liquid Commodity Index — Optimum Yield Gold Excess Return, but investors know by now that short ETFs have erosion, particularly when they use futures contracts.

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