Gold

Gold Falls 2.9% After Hot CPI, and Gold Miners Fall Harder

A hotter October CPI sent gold sharply lower and cut the gold miners ETF by about twice as much. The arithmetic of costs explains the gap.

by Corinne Ashdown3 min read

Molten metal pours from a glowing clay crucible into a row of cast-iron bar moulds, with steel tongs lying on a dark, slag-flecked bench.
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Gold fell 2.9% to US$4,019.30 an ounce by 12:22 p.m. ET on Tuesday, according to Kitco's live price page, after US consumer prices rose faster than forecast in October. Reuters reported at 9:27 a.m. ET that the data pushed up the dollar and Treasury yields and firmed bets on a larger Fed hike.

The Bureau of Labor Statistics said consumer prices rose 0.4% in October and 0.3% excluding food and energy, each a tenth of a point above the forecasts cited by Reuters and Kitco.

The miners fell further. The VanEck Gold Miners ETF (NYSEARCA: GDX) was down 5.75% at 12:24 p.m. ET on its Yahoo Finance quote page, about twice gold's fall by our arithmetic.

Newmont (NYSE: NEM) opened about 3.8% lower and was down 4.66% at 12:24 p.m. ET, according to Yahoo Finance. Agnico Eagle (NYSE: AEM) was down 5.02% at that time on Yahoo Finance.

Barrick (NYSE: B) lost 5.98% by 12:24 p.m. ET on Yahoo Finance, a day after its third-quarter report, and no document today explains the drop.

Why a Gold Miner Loses More Than the Metal

Why would a miner lose twice what the metal loses? A miner sells its gold at the market price, but its costs stay where they were when the price falls. The industry measures those costs as all-in sustaining cost, or AISC: what a company spends to mine an ounce and keep its mines running.

Newmont reported a by-product AISC of US$1,454 an ounce for the third quarter in its Oct. 22 results. Against the 12:22 p.m. ET spot price on Kitco's live page, the gap between gold and that cost shrank 4.5% by our arithmetic, while gold itself fell 2.9%.

The same arithmetic is harsher where costs are higher. Barrick reported a third-quarter AISC of US$1,911 in its November release. The same 12:22 p.m. ET Kitco reading shrank its spread about 5.4%. Agnico's US$1,648, from its Oct. 28 results, puts it near 4.8% on that reading.

Spot minus AISC overstates the cash a shareholder ever sees, because both Barrick and Agnico say AISC leaves out income tax, interest and dividends.

If you hold Newmont, the US$1,454 figure also flatters the quarter ahead. Newmont's co-product AISC was US$1,963, and the company said its unit costs should rise in the fourth quarter on higher sustaining capital and lower co-product volumes.

The leverage works both ways, as it did on the day we wrote Agnico and Wheaton Shares Jump as Gold Prices Rally. If you own bullion, you carry gold's move alone; if you own the majors, you carry roughly one and a half to two times it, in both directions.

The market has already moved on what the Fed does next. CME FedWatch put 87.5% odds on a quarter-point hike at the December meeting at 11:10 a.m. CT. It gave a half point the remaining 12.5% and a hold none.

We read that as a quarter point mostly priced into gold, which leaves a half-point hike as the risk that would hit your miners harder than your bullion. Our view is wrong if gold closes back above US$4,100 before the meeting without a softer inflation number to explain it.

The Fed's next decision comes at the end of its Dec. 8-9 meeting, and Friday's October producer price index, due at 8:30 a.m. ET according to Kitco's morning report, is the last big inflation number before it.

Seek the truth and be prepared,

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