With gold floundering just below $1,100/oz for the last week gold bulls are digging for reasons to be optimistic. However, the following two charts courtesy of Morgan Stanley Research indicate that relative to other commodities gold is fairly is expensive and producers have not yet responded to the recent price decline by cutting production:
Here’s a quote from Morgan Stanley’s most recent “Commodities Manual”:
“Despite the recent sell-off, gold’s price is actually holding well above its marginal cost…..Gold probably has the largest downside risk of all commodities that we track.”
In commodities, marginal cost is distinct from all-in cost of production. All-in cost is more appropriate for gold producers and investors who are interested in determining the long-term economics of various mining projects or companies, whereas marginal cost is crucial in understanding the downside potential for any given commodity market.
When commodities enter into a vicious bear cycle, which gold seems to be firmly in the grips of, prices can fall deep into marginal cost percentiles. That is a scary proposition for gold investors.