Gold's All-In Unsustainable Price

The cost of mining gold globally can't bear $1000 per ounce...

The PRICE of GOLD has see-sawed since the Federal Reserve raised interest rates on December 16, and market experts can tell if the action is good or bad for gold.

Rob Chang of Cantor Fitzgerald Canada believes that after the small rate hike doomsayers are overstating their case and that gold should sell in 2016 for about $100 per ounce more than today.

But for mining stocks, in this interview with The Gold Report, he argues that in today's climate cash costs of $1000 per ounce are the bare minimum necessary for survival.

The Gold Report: Some say the price of gold has for some time been suppressed by fear of a Federal Reserve rate hike. What do you think?

Rob Chang: Now that the Fed has finally raised the rate by a small amount at its December meeting as we expected, we will see a continued sideways trend for gold.

TGR: It has been suggested that the Fed has been exceedingly reluctant to raise rates because of fears that would kill the economic recovery and blow up the deficit.

Rob Chang: I agree absolutely. Raising rates is likely a bad idea, especially raising them significantly. The key question is whether the Fed will continue to raise rates, and if so, by how much. Higher rates cause issues across the board, issues that frankly I don't believe the US economy can handle.

TGR: Given the lack of a robust economic recovery since 2008, and the ever-increasing geopolitical instability throughout the world, the latest being a possible war between Turkey and Russia, are you surprised that gold has continued to fall rather than stabilize or rise?

Rob Chang: Yes. Given the geopolitical tensions you mentioned, one would expect the gold price to go up. To be honest, I don't know why it hasn't. I can only point to recent good US economic news and the potential interest-rate increases as the reasons.

TGR: Goldman Sachs predicted Nov. 19 that gold will fall to $1000 per ounce ($1000 per ounce) over the next 12 months. What are your predictions for the prices of gold and silver?

Rob Chang: For gold: $1173 per ounce for 2016, $1185 per ounce for 2017, $1200 per ounce for 2018 and $1250 per ounce by 2020. For silver: $15.69 per ounce for 2016, $17 per ounce for 2017, $18 per ounce for 2018 and then $19 per ounce long term.

TGR: We've seen that producers are already walking a tightrope. At $1050 per ounce gold, would you expect a perhaps final wave of consolidations?

Rob Chang: I certainly think that we're due, and I'm a little surprised we haven't seen more mergers and acquisitions already. Producers that do have cash would be well served to cherry pick among the many companies trading at extremely low valuations.

TGR: What are the attributes of the producers that will survive at $1050 per ounce gold?

Rob Chang: First, all-in sustaining costs (AISC) such that they can at least tread water for the time being. Second, management teams that will resist the temptation to buy cheap companies simply because they can. Third, projects in safe jurisdictions. At Cantor, we look for companies in world-class areas such as the Carlin and Battle Mountain trends or Red Lake: places where you don't worry that you'll wake up one morning to find your asset nationalized.

TGR: A bunch of juniors with late-stage development projects have been treading water for years in the hope the gold price will rise. If it doesn't, will these companies drown?

Rob Chang: Some will; others will be acquired by midtier producers. There are some companies that have good access to capital and have been very opportunistic in picking off companies or their assets at good prices.

TGR: Gold producers outside the United States, such as Canada, Australia, Brazil, Russia, are currently enjoying a tremendous Dollar premium. How much of a leg up does this give them over US gold producers?

Rob Chang: It's pretty significant, and the premium has increased by over 20% over the past year. With the direction the US Fed is going, and the associated strength in the US Dollar because of it, this premium has a good chance of getting even better.

TGR: Will we see mining capital flow out of the US and into those four gold-producing countries?

Rob Chang: That would certainly make sense. All things being equal, of course. But at the end of the day, a fantastic asset will always attract investment Dollars no matter the macro environment.

TGR: You make frequent visits to mining sites. What are the qualities you look for on site?

Rob Chang: I try to see the things management is trying not to show: the corners, the cracks, how the workers are interacting, the condition of the machines, how clean certain areas should be relative to what they are. I try to discover the actual conditions on site, and you can get that only from good conversations with the employees.

I look also for good infrastructure and for a sense of how projects are perceived by area residents. If community relations are poor, that could really sidetrack a mine no matter how good the other metrics are.

TGR: What have you learned from your recent visits to Mexico?

Rob Chang: Every company operating there says that its locations are safe, that the problems with the drug cartels are not there but in other locations in other states. That can't always be true. That typical response has become something of a challenge, and we are working out the best way of getting a better handle on it.

TGR: What is it about Nevada you like so much?

Rob Chang: As they say, when you want to find a mine, the best place to look is in the shadow of a head frame. Nevada is the home of many world-class mines. It has the Carlin and Battle Mountain trends. It is easier to find elephants there because Nevada is where the elephants roam.

TGR: Baron Rothschild supposedly said, "Buy when there is blood in the streets." Howe Street and Bay Street have seen blood in the streets for years. Is now the time to invest in precious-metals companies?

Rob Chang: I do think so. Given how few gold miners can make money at $1050 per ounce, I struggle to see how gold prices can make a further significant downward move. On the other hand, I see lots of potential for the gold price to move a lot higher. Looking at the relative downside to upside, we can say that gold could possibly move another $100 per ounce down, but on the upside, if events move in the right way, gold could move up several hundred Dollars.

TGR: Rob, thank you for your time and your insights.