Gold Prices: This Could Send Gold Prices Skyrocketing in 2016

Gold PricesHigher Gold Prices Ahead; Gold Miners Say So…

The negativity towards gold prices remains extreme, but this may only be the case for the short-term. For those who are focused on the long-term prospects, it seems gold prices may have a huge “sale” sign stuck on them.

To see where gold prices are going next, you must pay attention to gold miners. Remember that if they can’t sustainably produce at a certain gold price, the supply side gets hurt. If the demand remains the same, you have a solid case for higher gold prices ahead.

At the time of this writing, gold prices stood at $1,070 an ounce.

2 Things to Watch to Know Where Gold Prices Are Headed Next

With this in mind, consider the following: according to gold consulting firm Metal Focus, at a gold price of $1,100 an ounce, 25% of global gold production is underwater. (Source: “Gold mines are bleeding cash, but wave of closures unlikely,” The Financial Post, July 24, 2015.) Mind you, this is based on the so-called all-in sustaining costs. However, it must be noted that these costs ignore factors like taxes and interest costs.

Here’s some food for thought: if gold prices continue to go lower, as suggested by a few analysts, will gold companies be able to produce? You see, the lower gold prices go, the bigger the loss gold miners will incur every time they take an ounce of gold out of the ground. If gold prices are depressed, gold miners can set themselves in a better spot if they halt operations and wait for gold prices to move to the upside. In fact, we are seeing this happen at a few companies already.

Another factor that should be watched in order to better predict where gold prices are headed next is the cash flow from operations at mining companies. In the short-term, gold mining companies may be able to able to survive on losses, but if their cash flow from operations is anemic, they could run into severe troubles. Shutting down operations could be just one minor problem; their long-term survivability could be on the line.

Mining companies can generate cash flow from financing and investment activities, such as borrowing cash, issuing more shares, or selling their properties. However, when overall market conditions are worse, raising capital, borrowing money, or getting rid of assets could become difficult.

Except for a few major gold mining companies, generating cash flow from operations is really becoming an issue. Take Kinross Gold Corporation (NYSE:KGC), for example. In the third quarter of 2015, the company generated $232.1 million from operating activities. In the same period a year ago, this amount was $304.5 million. This represents a year-over-year decline of close to 24%. (Source: “Kinross reports 2015 third-quarter results,” Kinross Gold Corporation, November 10, 2015.) That’s a tough loss for a company to swallow.

Could Gold Prices Hit $1,600 by 2016? It’s Possible

Gold has had a difficult time over the last few years and gold miners have suffered even more. Looking at current gold prices and the costs to produce the precious metal, we could be in for a surprise next year.

Heading into 2016, I will be closely watching the supply side, as it shows signs of severe stress. If this continues and demand remains solid, we could see gold prices well above where they were back in 2013, up around $1,600 an ounce, in no time. It’s not rocket science; it’s just basic economics.

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