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 (NYSE:MS) 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.