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« Gold: Where Do We Go From Here? | Main | Deficit could exceed $1 Trillion! »

Gold and Gold Stocks: Hammered by global De-leveraging?

Gold and Gold Stocks: Hammered by global De-leveraging?
(click and click again to enlarge)

This week has seen gold plunge as the above chart shows gold’s $200/oz decline from $925/oz only a short while ago to trade at $725/oz as we write. Margin calls, de-leveraging and the general flight to cash continues at some speed. On top of this we have a number of countries reducing their interest rates with the effect of reducing the value of their particular currency, which in turn adds to the strengthening of the US Dollar, which now stands at 85.62.

Back to the chart where we can see that gold has fallen and then bounced off the $750/0z level only to fall again. We had hoped that gold would form a double bottom at this point but unfortunately it went straight through it to close at $728.85. We now need to see a reversal next week in gold’s performance.

It is difficult to understand why gold isn’t performing as it should so we cast around to see what others were saying:

On BNN yesterday John Embrey chief investment strategist, Sprott Asset Management: He pointed out just how difficult it is to obtain physical gold and eluded to the possibility of the Comex being unable to deliver on its obligations as early as the December contracts. Click here if you want to watch the interview in full.

The Motley Fool: They had this to say about Yamana:

But even with Yamana's shares far from their 52-week highs, the company carries a next-to-nothing long-term debt-to-equity ratio. And many CAPS members like Yamana's rich reserves in its existing mines, and see solid long-term potential in its low-cost structure and growth plans. As such, 97% of the 3,152 CAPS members rating Yamana Gold expect it to be a market-beating stock.

James West on
Ignore the negative press on gold, and recognize the current price weakness for what it is: the last time you’ll see gold this cheap in a long time, and therefore a huge opportunity.

Jim Sinclair said this which re-enforces the importance of gold in current times:

Gold is the only viable insurance. Clearly equities (with the exception of precious metals shares) are not.
Gold is the only viable insurance. US Treasury bills are not because the yelling at all the rating agencies in Washington today just might get US credit downgraded.
General commodities have been viable, but by nature they are too wild and from now on will be selective until Pakistan implodes and Weimar appears
Banks cannot offer insurance as they are in the main bankrupt.
Insurance companies cannot offer you sound insurance.
Money market funds are not insurance, making gold the only viable insurance.
Retirement programs are no longer insurance.
Jobs are no longer insurance as companies are run by lawyers and accountants.
Equity in your home is not insurance because it simply does not exist.
Your family is no longer insurance because they have the same problems you do.
The assumption your kids will take care of you in your old age is not viable insurance no matter what you think.
Gold has no liability attached to it and is therefore the only viable insurance.
Gold is universally exchangeable, making it the only viable insurance.
Gold has historically performed perfectly in maintaining buying power, making it the only viable insurance.
Gold is the only viable insurance because it is Honest Money.
Since gold is the only viable insurance and because everyone needs it, gold will trade at levels of at least $1200 and $1650.

The unwinding of positions especially those on margin appear to be the key to this current situation. The longer this de-leveraging goes on the more the markets will fall. Is it a buying opportunity? Well we would prefer to see to some signs of a bottom before making any further investments but don’t let us put you off, we have been wrong before.

Got a comment – then fire it in.

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Reader Comments (18)

Why USD is getting higher? I think a new bubble is being created, a high USD even when the fundamentals are weak. This bubble is getting to big to fast (hence gold is getting to low to fast) so I think the burst will be like the collapse of a building.

October 23, 2008 | Unregistered Commenterenrique terceros

I have been looking at metals where the price of the metal is less than the cost to produce it. The theory being in that case, mines would shut down and supply - demand would push / keep the metal price up. In general the price of Au, Ag and Cu are above production cost and have more room to fall. Zinc and Molybdenum are closer to production cost. In theory I would expect HBMFF or TC to do better than AEM. However that is not whit I see in the charts, all 3 are down about the same over the past 3 months.

Any comments on the ability of production costs to hold up metal price and stock price?

October 23, 2008 | Unregistered CommenterBC

I don't think that gold is Honest Money. I guess Jim Sinclair never heard about Silvio Gesell and his free-money. Of course, if you compare gold with US dollar, the federal reserve debt-money, you can say Gold is Honest Money. I guess the same people who created the Fed (and probably the current crisis) will suggest after the coming and greater crisis the world should adopt a new monetary system based, again, on Gold. I know this may sound crazy. Sorry if someone gets annoyed.

October 23, 2008 | Unregistered CommenterTimón

This piece from Goldbiz, actually says it all; Deleveraging.
Spot on right this time. Gold miners will rally, no doubt. Only in the long run and after the recession is becoming growth session. Confidence and demand back in line.

For short investments in gold miners: Get out of there.
For Long investors; buy your small azz empty.

Hold on peepz, just a few more dozens of months. ;)

October 23, 2008 | Unregistered Commenterde Graaf

Any of you that are down under, what is your view of Fortescue Metals Group Ltd?

October 23, 2008 | Unregistered CommenterBC

I anticipate $1500 to perhaps as high $1700 Gold by mid February to begining March ... and then a gradual sell off begining April ... Do you see any good Gold/Silver options for this scenario?

October 23, 2008 | Unregistered CommenterRichard Crawn

Well BC, i'm not down under, cause I sold with a minor loss last month. If I buy back now, which I won't do yet, I have a 50 percent discount already. Well get better, i'm confident.

On Fortescue Metals Group, I can tell you this;

- quote 21st July 2008;
Talking to journalists yesterday, Mr Forrest said he was confident about the demand for iron ore from China for the next 10 to 15 years. "The growth of the steel sector in Asia is not noticing the credit meltdowns" in the US and
Europe, Mr Forrest said. - End quote.

Well, first of all, we can conclude CEO Mr. Forrest was too optimistic about his demand forecast. China experts announced they have 20 percent less demand for commodities following to the global credit crisis. They are still confident for 7 - 9 percent growth for 2009.

Secondly, FMG is a growing company, just made its 5 year anniversary, and need capital to enfold his ambitious plans. Now that demand of commodities, thus iron ore spot price is down 60 percent, the income generated per tonnage will be equal rate lower, if unhedged.
That said, expansion in a time like this can be very interesting, as prices fall in all sectors. This can be an advantage for FMG is they have enough capital to support it. Requiring capital is expensive nowadays.

According to an announcement made by Fortescue Metals Group today, the outlook is according to plans, and they don't see any delivery problems with China.

Share price I probably don't have to mention, as deleveraging takes money out of every sector nowadays. As you will agree with me.


October 23, 2008 | Unregistered Commenterde Graaf

de Graaf, I held it in the past for a small gain. I currently have no base metals, 3 are on my research list: Fortescue, Thompson Creek and Hud Bay Minerals. Much of what you say about Fortescue, looks like it would apply to the other two. If you have any comments, I would be delighted to see them.

If / when you get ready to re-enter base metals (or commodities in general), drop a note. Your comments are informative.

BC, Tampa Bay USA

October 23, 2008 | Unregistered CommenterBC


This isn't a dollar thing, nor gold, nor bear market, or whatever. This is a bank thing and the leader is Paulson with Benny no.2. Their job is simple, accumulate as much as the remaining wealth, channel it the big banks. The jig is up, it's over, they know it so they are grabbing every last can of food on the shelves they can, hoarding it, so they will survive not what is here but what coming. With that single minded focus even the dog is getting put ut on the street.

Hedge might engineer a short rally but in the end they will own nothing and have a few bucks in the bank and they will just simple fade away.

I have in my eyes dropped a fortune with these gold stocks. I haven't sold one, dollar cost way to early, and intend to sit, cherry pick and believe what I know to be true; gold always been the asset which rises in trying times. It will happen here as well. It just a matter of seperating heart from head and hold the course. Be right and sit tight.


October 23, 2008 | Unregistered CommenterkEVIN MERRY

Interesting interview with mr Sprott. Few things I'd like to know, what if the December contract really does fail and people don't get their gold, what will happen then to the price of COMEX gold?
And what will you get in return, more paper gold worth nothing?

And when does the December contract get settled? around the 17 december?

October 23, 2008 | Unregistered CommenterQuin

Guys that scream; You Got It All Wrong, I skip reading.

That said;
I wanna raise some discussion here about the Gold price situation and the relation to gold/silver miners. Anyone that can add an interesting comment is welcome!

What I thought for long until recently, was that gold would rally back to new highs just like mid March 2008. But after analyzing the current financial turmoil and global recessions being announced by the IMF (International Monetary Fund) I have strong reason to believe that this may not occur in 2009! Not the expected $1200 to $2500 highs analysts talk about as feasable...

Why you may ask?
Well, in my opinion an enormous amount of cash (20 trillion dollars according to some estimates) has been extracted from the global markets. An enormous amount of this money is based on margin credit, that is debt.

Debt needs to be paid back, but people who have lost their 'fortune' go bankrupt, or people who sold all their stocks to cover margin calls, are drawn empty. And people who stick to their positions, cannot withdraw their money for the coming 5 to 10 years if they want to regain their initial deposit positions.

The other side of the coin; The riches of this world, still have a lot of money. Some (with Wallstreet brokers) even got richer by selling in early stages. Other riches (from wallstreet ;)) lost a heap, but still manage luxurious daily life with their common luxury assets.

In total, wealth has been distributed once again.
By leveraging of banks, mainstreet people were saddled with debt credit. Some of them shareholders (speculating with borrowed money is never good, is a lesson from this) are wiped out and the rich remain wealthy.

I come to my point about gold miners now;
The rich have the money to protect themselves against inflation and deflation if it occurs. They buy gold bullion in the future to safeguard their wealth. Some of them, like Warren Buffet, buy quality stocks for the long run.
But the money that came from the simple mainstreet investor is wiped out for good, apart from some a single savvy individual that did make a killing from this crash.

Thus the gross of people can not invest anymore and therefore miner stocks (and alot of other stocks) will not rally for years from now!
Each sector will have its own cycle back on its feet. Some will never be as strong.
And offcourse commodities will be needed, but gold for jewellery is not in a good position! (60 to 70 procent of world supply is for jewellery demand).

So gold miners stocks may need a very long time to recover after this crisis, that is now just starting to be visible in the real economy. In YOUR wallet, soon.

I expect a very slow recovery on gold miners. Some with best cost per ounce will be the winners. The others not for a long shot.

Please give me your thoughts on this one.

October 23, 2008 | Unregistered Commenterde Graaf

The hedge funds have been selling everything . Soon gold and silver are going to take off.

October 23, 2008 | Unregistered CommenterScott

Thanks Scott, for your reaction.

Hedge funds are one of the reasons of the stock market crash. But also hedgefunds have their rules.
For instance, some hedgefunds require their participants to lock on for a minimum of 5 years. Others demand a minimum entree deposit amount. Some have no requirements at all, and withdrawal is possible at any moment in time.

So why did hedgefunds sell all their gold stocks and (to a lesser extent) bullion recently?
Different reasons occured;
- withdrawal due to the need of capital to cover losses in other investments
- withdrawal after funds triggers and trailing stops
- withdrawal of participants after bad results due to hedgefund investment strategies.

There are many reasons for an investor to pull back out of ETF's, hedgefunds and municipal funds. If a steep decline occurs, fear is an important factor. Nobody wants to sea the numbers turn to red and see losses increase on a day by day basis. Emotional selling occurs, even with huge losses.

So what happens, is loads of money evaporates from the stock market globally. And that has an enormous effect on the investor sentiment.
People will wait, postpone investments, enjoy their liquidity and most importantly their lives by buying another quality product that lasts. No more gadgets. No speculation for some time.

Its like making a expenditure oversight.
Scrap this, do that, ease on this. Keep a surplus amount of credit to keep afloat in rough times, and just don't buy that shining piece of jewellery you wanted forever in the coming years. (remember; almost 70 procent of gold demand comes from jewellery)

Philosophy states; Gold will go down if recessions deepen.

Only hope is when inflation hits, after the EU and some Asian economies return to growth (thus lowering the US dollar), and when money enters the system again, instead of contracting the money flow. Only then will the gold bull continue to new highs...

Keep em coming. We'll keep learning every day until one day, we make a killer. :)

October 23, 2008 | Unregistered Commenterde Graaf

Many observers have expressed disbelief that the Fed is actually aggressively reducing the monetary base, in particular that part of the base which directly affects the trading accounts of 20 of the world’s largest banks, the Fed’s Primary Dealers. Wall Street Examiner Professional Edition subscribers have had the benefit of seeing the data on a day to day basis as charted in the daily Fed Report. The general public however, has not had the benefit of that insight. The vast majority of market pundits, economists, and quasi-journalists for the mainstream infomercial outlets like Marketwatch, the Wall Street Journal, Bloomberg, and especially CNBC, are totally clueless. To a man and woman, they all think that the Fed has aggressively been adding liquidity to the system.

The proof, they say, is in the pudding and the Fed has just served it up in multicolored, multi-layered glory. The Fed itself is confirming, in graphical form, the very facts that I have been reporting on and charting for our subscribers every day for the past half year and more. The Fed has aggressively collapsed the size of the System Open Market Account, beginning slowly last July, then moving aggressively beginning in December. The effect has been to withdraw billions of dollars of what is, in essence, margin buying power from the trading accounts of the Primary Dealers.

October 23, 2008 | Unregistered CommenterTrevor

So, gold had gone down and may go down some more and take some amount of time (perhaps months, perhaps years) to recover....

I have been looking at where to put some remaining cash to work. I have been looking at base metals that fill a key industrial need and have a price at or below production cost. The theory being that some mines will close and supply - demand will push prices up. The problem is that this could take several years to occur. I am thinking of miners like FSUMF, TC and HBMFF. How low can they go? That is the question.

I am also looking at energy where the company has huge reserves in politically safe locations, I am looking at CHK, DVN, UPL and PBR. I may consider RIG based on (A) unit supply / cost / lead time and (B) the stock's valuation.

I currently hold gold and silver miners.

October 24, 2008 | Unregistered CommenterBC

As a fervent subscriber of Stansberry & Associates, I will today share a piece from their mailbag;

"A few weeks ago I bought Yamana and Nova Gold, and I'm still holding SA and Great Basin. All are down considerably. I'm not panicking because I feel they are value plays. What would you guys suggest?"

Ferris comment: Of course, I cannot give personalized advice regarding the positions you name.

But here's what I tell anyone interested in gold investing: Don't ever forget that gold stocks aren't gold, they're stocks. And if there's one trade that's still in heavy liquidation, it's the short-dollar/long-commodities carry trade, where hedge funds sell short dollars by borrowing them on the cheap and buy commodities in various forms, including gold stocks.

Lower your near-term expectations on all stocks, and don't let people ever tell you they know where the bottom is. They don't. Ever. (end quote)

Some other interesting info was given by S&A analysts who have some insider knowledge to share with us gold bugs.
"Sometimes, it's absolutely essential to know a real insider, someone who's been around for decades and knows what's happening in a particular market. So when we saw an e-mail this morning from our friend Van Simmons at David Hall Rare Coins, our eyes widened...

Says Van, "The world is buying all the gold and silver it can put its hands on and has taken the physical supply off the market. It is my understanding that all mints from China, Australia, U.S. and Canada... are all out of gold and silver coins for sale."

The gold market is small compared to the stock and bond markets, and therefore much easier to manipulate. Says Van, "I suspected the market may be controlled by someone, and come to find out, there has been one big buyer of virtually all the mint production of coins. He buys all he can and then supplies certain wholesalers who get them graded by PCGS or other grading companies and sells them to dealers who then sell them to clients at higher premiums. So they have taken a bullion product and are making it more valuable.

"The guy who has been buying all the mint products feels like there is going to be a large demand over the next several years worldwide for bullion coins, so he has taken his positions in gold (maybe futures) and hedged them against the mint products and is making several percentage points. He told me last week he has sold hundreds of millions of dollars of mint products this year. Smart guy." (end quote)

Having shared that; I would like to thank Trevor who gave us an interesting link:
It shows us some proof and a new way of thinking on how the contraction of the M-money supplies is developing today, more or less. We still have a long way to go for full disclosure.

Next I would like to share is something of government fraud, some call it conspiracy. Something I am not fond of, but most intriqued by, because of the lack of value from gold as a currency that should rise in times like these, but it does not. Strange. This should give you another theory, from James Conrad of Seeking Alpha.
Topic name: The Disconnect Between Supply and Demand in Gold & Silver Markets; follow this link:

Hope it all comes together. If all is partially true, than gold will have a long way before its true value will occur. We unfortunately can't peek into the vaults of the largest Banks in the world, and audit their claimed gold supply.


October 24, 2008 | Unregistered Commenterde Graaf

Okay, so we have gone and bought gold (at $900) and have faith that it will come back when the s!%t really hits the fan and we need it to buy bread. But what happens when the government makes gold ownership illegal, as it has in the past, and we are forced to turn it in for worthless paper currency?

November 24, 2008 | Unregistered Commentercarolyn tyler


You should do the same thing some other savvy individuals did after the 1933 gold ban. Just don't bring in the gold! Keep it at a safespot until the ban is lifted again some day.
And you could probably sell it onto the black market, or exchange it for a ton of bread, milk etc. at a farmer/landlord, in case we would return to the dark ages...

I doubt if things come that far, these days. ;)

November 24, 2008 | Unregistered Commenterde Graaf

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