If the real price falls, it can't go much below the production cost (currently averaging about $1,100/oz).
Not saying that I believe gold will drop below that, but I don't see how production cost forms any real barrier for gold price. Surely the newly mined gold is only a very small part of the overall supply in the gold market? It doesn't matter if the miners refuse to sell below their production cost, if everyone else is. Or perhaps you meant something else?
Yes. The price can easily go down the production costs. It just wont.
Agreed - the price can move lower. Production cost isn't a "hard" barrier; more like a pivot point. Only the strongest and most efficient of mining companies can withstand low prices and/or return for extended periods of time, though.
The reasoning for price not being able to remain below production cost comes down to simple supply & demand fundamentals.
If gold is in demand and there is enough supply to meet the demand, fluctuations in price will be minimal - price stability. With the kind of huge overabundance distortions in supply that have been masked by derivatives, in combination with rapidly rising global demand means that there will be major price volatility as capital flows into gold.
For whatever reasons, many analysts still dismiss the supply/demand dynamic of gold production as well as the metal's increasing monetary function, despite the data being obvious.
It might help to imagine an inverted crash.
As the supply/demand fundamental line rises, capital becomes increasingly attracted to it. The price swings will revolve around that line, growing more violent the more capital flows in.
Price can only diverge so far from the fundamental before it completely decouples into its own abstract exchange, the financial instrument related to the underlying component only being associated by name - not function (i.e. the "price" of gold fell to $1,535, but the actual item couldn't be bought for less than $1,650 - take that to extremes; an official price of $1,000 - dealer sale price to you of $10,000 or more).
We're just starting to witness the first real waves hitting - 4th quarter of 2010 was just a warning surge. After this year is over, we get slammed with a full financial storm. It will start to rip apart official market associations, and anyone not on financial high ground (by holding physical gold) will be swept away into decades of poverty (Bitcoin may not be a viable solution yet, but having some wealth in the system now could be highly rewarding even for "late" early adopters).