Izabella has a post
on FT Alphaville on the changing structure of the oil market. The point of
interest for me is that the speed with which shale oil can be developed, as
well as shut down and restated, means that "the clearing price of
oil in a shale world needs to be much, much lower to dissuade unnecessary
investment, and also needs to rise much less significantly to encourage it
when it is necessary".
The take away for the gold market is that the run up to $1900 no doubt
resulted in a lot of marginal gold mines being developed that probably
shouldn't have been. At current prices these are not profitable on an all in
basis but they are holding on as prices do cover marginal cash costs. We need
a much, much lower price to really kill this potential supply but this
hasn't happened - we haven't seen large numbers of bankruptcies or care
& maintenance mothballing occurring. The fall in the oil price will
probably give these mines some breathing space.
As the money spent on developing these mines is a sunk cost, the problem
is that they will stay around and we only need the price "to rise much
less significantly to encourage" them to continue producing gold on a
cash costs basis. The result is that this may crimp increases in the gold
price compared to the situation where a lot of the sub-standard projects
would have been cleaned out and the potential for increased supply on any
price increased would have been muted.
Rick Rule has been talking about how few listed junior miners are
worth investing in. Unfortunately the oil price drop may mean that the others
don't
"go to company heaven" resulting in a sideways gold price
as they keep on producing any time the price shows strength and affecting the
marginal supply/demand balance.
