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« Goldman Sachs Upgrades Gold/Silver Stocks to Neutral; Barrick (ABX) Upped to Buy | Main | Gold's Gory Crash, One Year On »
Wednesday
Apr162014

Gold, Silver And The Mining Sector: Prepare For A Severe Fall

Background

This is a distressing time for gold and silver bulls like me who are constantly on the lookout for a turnaround in the precious metals sector. I’m confident that it will come but not just yet, as a final capitulation has not taken place. On 18th November we wrote the following:

This sector is to some extent in the hands of Janet Yellen and The Federal Reserve. If the economy takes a turn for the worse and she behaves as dovishly as she is portrayed then we could see an increase in QE. However, if the employment figures continue to show slow but steady progress, then there will be no increase in QE and then the outlook for these metals will look less attractive. Should tapering be introduced the US dollar will appreciate and gold, having an inverse relationship with the dollar will suffer. 

The Fed appear to be satisfied that the economy is making steady, if slow progress and is on the road to recovery, hence the introduction of tapering. This programme of reducing QE possibly to zero looks set to continue and be completed towards the end of this year, barring any sudden reversal in the employment/inflation data for the US.

The perma-bulls among us are confident that the lows formed in June 2013 for gold prices represent the bottom for gold and their enthusiasm for higher prices is indeed infectious. However, we view this stance with some trepidation as we are still of the opinion that this gold bull market remains in a bear phase for now. The bears won’t always have the upper hand, but until this bear phase exhausts itself completely there is little chance of a sustainable rally in this tiny sector.

To maximise our profits we need to time our entry and exit points to the best of our ability. We all know that finding the exact bottom or top of a market is almost impossible to do, but this does not preclude us from trying to get as close as possible to these major directional changes, in this case from the bear phase to the resumption of the bull market.

As we write Gold is trading around $120/oz above the June lows, silver is about $1.50/oz above its low point and the mining sector as evidenced by the Gold Bugs Index, the HUI, is sitting about 20 points higher. This is not the picture of a runaway success story, on the contrary it depicts a sector struggling to gain any traction and lacking in conviction.

Retail investors and fund managers a-like need to have a clear view of the big picture before committing hard earned cash to any investment opportunity, failure to do so will render success as elusive as the Scarlet Pimpernel.

Gold and Silver

The sparkling days when gold hit $1900/oz are now a distant memory as gold has fallen back, rallied and fallen back again. A number of head fakes and false dawns have placed gold prices in the precarious position of approaching the summer doldrums in a state of weakness. Gold is unloved and to some extent forgotten as its current bear phase has dominated for close on 3 years now, driving the weaker hands out of the market and putting a dent in the portfolios of those brave enough to stick it out.

Silver prices have enjoyed a brief flirtation with the $22.00/oz level but failed to hold onto those gains. It is now trading at $19.58/oz which puts it back to where it was in December 2013, in a sideways trading channel.

The HUI

The performance of the precious metals mining sector is predicated on the performance of the underlying asset, along with the ability to produce the metal at a price lower than the selling price. Mining costs have accelerated over recent years with some costs now standing at $1200/oz, which has to be achieved before we can talk about profits. However, when these costs have been covered every dollar earned above these levels goes straight to the bottom line. This then becomes an exciting time to be invested in the mining sector as stocks can rise, in percentage terms, 2 and 3 times more than the metal itself.

Taking a quick look at a chart of the HUI we can see just what a difficult time the miners are experiencing. A re-test of the June lows looks to be on the cards and should that support level fail to hold then we could see a re-test of the old ‘150’ level which was formed in 2008.

 

A certain amount of euphoria was generated in the first quarter of 2014 when the miners came out all guns blazing. This rally was short lived and as of today the overall gain for this year is about 10%. When we take into consideration that these stocks had their values halved in 2013, then we can see that this move upwards is hardly a cause for celebration.

Conclusion

Among the many factors that we can point to as being influential for precious metals the following are just a few;

Mints around the world occasionally run out of coins and bars and are unable to meet demand.

China and India remain huge purchasers of physical gold.

Iraq bought 36 metric tons of gold last month valued at about $1.56 billion, one of the largest purchases by a country in the last three years.

The printing and debasement of paper currencies by a number of nations continues unabated.

The supply of gold to the market is said to be dwindling.

The situation in the Ukraine would appear to be getting worse despite the efforts of our political leaders and their negotiators, increasing geo-political tensions and fear.

As logical and sensible as these arguments are the fact remains that gold and silver are not heading to the moon just yet.

There could be one or a combination of reasons for this lack of progress, but the two that get our attention are the lack of a final capitulation in gold and silver prices and the reduction of QE via the Fed’s tapering programme.

Gold’s progress was characterized by a sudden steepening of the curve leading to a final blow off when the price had gotten ahead of itself. We now need to see a similar occurrence take place during a sell off. However, this sell off, as torrid as it has been lacks that final spike down which occurs when even the most ardent bulls have had a guts full and finally throw the towel in.

Gold and silver’s inability to sustain a decent rally suggests that it could re-visit and test its old June lows. Should this support fail to hold we could then experience a rather disorderly sell off taking gold back to the $1000/oz level.

The ‘sell in May and go away’ strategy may be adopted in the coming weeks which may add additional selling pressure to the mining stocks.

Also take note of the Federal Reserve Meeting planned for April 29/30th for any changes to monetary policy regarding tapering/QE/Rate changes, etc.

Finally we need to see more in the way of all around strength in this sector before we can implement an aggressive acquisitions strategy, and so we have the lion's share of our portfolio in cash.

Got a comment, fire it in, the more opinions that we have, the more we share, the more enlightened we become and hopefully our ‘well informed’ trades will generate some decent profits.

From the small team here we wish you and yours a very Happy Easter. 

The miners have started 2014 very well indeed on the back of rising gold prices, so the question is; is this the real deal or another head fake? Is the bottom really in? Could there be a final capitulation just ahead of us? Will the summer doldrums take the PMs lower?

If you would like to know which stocks we are buying and selling please join us atStock Trader our premium investment service.

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Reader Comments (14)

Guys,

Jeez. This isn't that complicated or mystifying.

The oceanliner that is paper is going down. The clownbuck can't survive. And they want to keep everybody out of the lifeboats ... except themselves ... so they do what they did on Tuesday and dump 14,000 contracts in minutes ... 4,000 in less than a second to set the cascade in motion ... with one purpose and one purpose only ... to drive the price down.

And you react by saying gold can't sustain a rally. Well no. When you've been kneecapped by a thug, held to the ground and beaten, and every time you try to get up, you get beaten down again, it's hard to look sprightly.

Look, the strategy here has become obvious.

Buy physical gold and silver on these smackdowns and just hold for the eventual rise. How much? That depends. If you're in it just for the protection ... for the hedge .... maybe all of it. But for those of us who don't exactly enjoy getting beaten down with impunity by the Fed's thugs at JPM, you do the very opposite of what a disciplined trader would normally do.

You sell upside breakouts, because they're traps laid by JPM for the tech funds who responds as the automatons they are to chart patterns.

You buy after they've executed several bear raids in succession and have exhausted themselves.

Simply do the reverse of what they're baiting you to do. The easiest way to do this is to sell OTM puts into weakness and sell OTM calls into strength ... just above the breakout zone, all the while waiting for the day these scumbag naked shorts get squeezed but good.

But PLEASE, can we stop pretending the gold market is responding to the labor market, CPI, the Ukrainian siituation, tapering, et al. Gold went down as QE 4 ramped up. It rose into tapering. It went down into this week's very bad news from Ukraine. It hasn't ahown and particularly strong negative correlation to dollar movements.

This isn't a free market balancing the forces or supply and demand. It doesn't respond the way a normal market would to news. It's a rigged casino. 90% of the movement results from the interplay between the idiot tech fund mice and the JPM cat who toys with them and bats them around whenever he pleases.

April 17, 2014 | Unregistered Commenterfallingman

Hi Bob,
-
To say anything about what you have written would be arrogant,
as if I could add to such a perfectly-written article ! I cannot.
-
We both know what is coming, but the gov't's ability to kick the
can down the road has been frustratingly evident ( so far ) .
-
I posted a link to your piece on this discussion Board :
-
http://investorshub.advfn.com/Pinetree-Capital-Ltd-PNPFF-16868/
-
Specifically, in Post number 139, which I wrote :
-
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=100791695
-
I have a friend on the board, "NYMOM", who will be a bit angry with
me for what I wrote, and also with you for what you wrote . Ridicu-
lous, I say! A person needs to read dissenting opinions more than
s/he needs to read opinions that are in full agreement. Too obvious.
-
GREAT WORK, keep the faith buddy !!!
-
It is always darkest before the dawn — is one of those foolish state-
ments that everybody makes. In the case of gold, it may be completely
true.
-
Thanks !
-
George

April 18, 2014 | Unregistered CommenterGeorge

Hi Bob,
I read your article today on 321.gold, I found it worthwhile. Your
thoughts and rationale align with my chosen strategy. Even your
timing (May 2014) is spot on. Sharma Mahendra also predicts May
as the low for gold and silver.

These are the facts: 1) The U.S. Govt. is bankrupt and our trillions of
dollars of DEBT will never be repaid.
2) The U.S. dollar will be DEVALUED officially, probably
when the Gold Price is RESET.
3) The DOLLAR will LOSE "reserve currency" status, most
likely within 5 to 7 years.
4) The current worldwide financial system is DOOMED, use any
metric: HFT, Gold suppression by central banks, Dark
Pools and Derivative trading, Assets not "marked to markets"
BOGUS Govt. statistics, Corrupt political class: worldwide,
and MEDIA lackeys reporting propaganda.............etc.


I believe its "social media" and "private commentators" like yourself, who give
the general public the TRUTH. Please continue your excellent commentary.

Thank you.......John

April 18, 2014 | Unregistered CommenterJohn

Bob,
I agree with everything you said in the above referenced article. I would add or stress the following:


1. The physical quantity of gold in the London/Swiss Reserve has diminished to almost scary levels.
China has taken to buying Gold direct from the mines bypassing the market channels. This produces
an unknown in market volume and valuations. China is also keeping its gold buying largely hidden
and protected from market variables.


2. Rumors are spreading that China is about to release a gold backed Yuan in the next 6 months. If it
happens the dollar will certainly take a major hit. All indications of their continued and newly signed swap

deals point toward this.


3. Geopolitical factors continue to make the metals market unsteady. Situations roll from one country to another.
Each producing only a short term spike. Each event keeps the price from dropping to where the manipulators
want the pricing levels to be.


4. As pricing drops mines slow down their product sales and retain larger inventories of unprocessed ore.

5. Small investors are more and more unsure of the future and therefore are not selling physical metals, only large
investors are in the market. Buy and hold is the watchword on the among smaller buyers. Local coin dealers are
still busy selling.


6. Inflation in the US is increasing at a level of almost 10% not the phony levels the Government publishes. You only
have to go to the grocery store and compare the prices of today with 6 months ago.


All of this does not even get into leased metal, carry trade, or questionable ETF inventories. With prices of all metals lower than
what they should be, the only conclusion to be made is there has to be a massive multi-country collusion in the works.
When pricing will pop is anybody's guess. When it does it will be uncontrollable.


Jack

April 18, 2014 | Unregistered CommenterJack

Not one mention of manipulation you must have plenty of Kool Aid

April 18, 2014 | Unregistered Commenterunknown

Bob,

Like Japan, The trend is still in the wrong direction for the USA.

The Debt is still growing, The deficits are still growing, Local Inflation is increasing. The trade Deficit is still there.

QE is still the game of the day and will continue to be as there are now more takers than producers.

Long Term, the actual tangible product will win the day.

That’s how I see it.

David

April 18, 2014 | Unregistered CommenterDavid

Your column today provides interesting perspectives. I will provide some in return.

I read 321gold.com daily, along with a lot of other sources on which I base my own plans.

It is clear that your orientation is that of a trader, and it is one that I respect but can't (for reasons of time and temperament) emulate or practice.

In this particular instance I will take the results of your research as a suggestion to add to my own holdings of physical gold (at this point >1000 ounces) with caution, waiting for what might be a drop of several hundred dollars an ounce. For purchases, cheaper obviously is better.

One of the main reasons why my own stance is somewhat relaxed in this matter is that the very great bulk of my family's gold purchases was done in the
2004-2009 time frame, with only small and sporadic purchases since then. I think that our average cost per ounce still is <$900 per ounce.

In all of our attempts to get investment returns (at 71 years old and in the top 1% of assets, all earned) there is a need to look at the entire landscape.

I can't say that you are wrong in predicting a severe fall in the price of gold; I accept that you study that aspect of things more closely than I do. But
the rest of my context is expectation of a substantial fall in Dw, S&P, Russell, etc. -- perhaps more substantial than in gold. Bond valuation is immensely difficult due to unpredictable systemic factors on vastly important scales; bonds could notch modest gains in a down economy (which, realistically, is where we are), but the probability of an interest spike and hence bond price drop is palpable. Cash returns nothing although it forms a reserve for purchases at lower price levels.

Against this background, I think that anyone who is not holding gold -- without minute regard to price -- is taking the greatest risk of all. If you could write a piece that would help people who do not hold any gold (for various reasons, fear of price fluctuation being a major one) to ease stepwise into gold holdings, you would be doing them a service of great value.

Sincerely,
Bob

April 18, 2014 | Unregistered CommenterBob

Hi Bob,
-
To say anything about what you have written would be arrogant,
as if I could add to such a perfectly-written article ! I cannot.
-
We both know what is coming, but the gov't's ability to kick the
can down the road has been frustratingly evident ( so far ) .
-
I posted a link to your piece on this discussion Board :
-
http://investorshub.advfn.com/Pinetree-Capital-Ltd-PNPFF-16868/
-
Specifically, in Post number 139, which I wrote :
-
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=100791695
-
I have a friend on the board, "NYMOM", who will be a bit angry with
me for what I wrote, and also with you for what you wrote . Ridicu-
lous, I say! A person needs to read dissenting opinions more than
s/he needs to read opinions that are in full agreement. Too obvious.
-
GREAT WORK, keep the faith buddy !!!
-
It is always darkest before the dawn — is one of those foolish state-
ments that everybody makes. In the case of gold, it may be completely
true.
-
Thanks !
-
George

April 18, 2014 | Unregistered CommenterGeorge

Greetings Bob -

Enjoy your work on 321gold. The only 'issue' I have is the $DX. Where is it...? Not to get 'conspiratorial', but a perpetual sub .85, and grinding lower by the month just doesn't quite comport with the gold price. Neither does $100/bbl. oil average. This, in light of the fact that for the past ~2 years, the $DX bulls have literally pinned their reputations (for those of us who copy & paste anyway...), on a rising, if not 'soaring' $DX. It ain't happening... Something is going on out there in the hinterlands of $DX sentiment, and it is not exactly 'comforting' in my view.

All the best,
-cc

April 18, 2014 | Unregistered CommenterCC

Hi Bob,

I liked your article while the price of gold may drop from here like you suggest to around 1000
I am thinking that it won't because the stock market is hugely overpriced at this point and the
rally is over imo.
Here is why I think that:
1. coke had a 4% revenue drop but stock ent up 4%
2. Intel had 1% revenue growth
3. dupont had a 3% drop in revenues and earnings from last year but stock is up 20% from where it was then

Mcdonalds walmart warned fed said that credit card use dropped 3.4%
apps for Refis and purchases at 2 decade lows reported about 30 days ago
So I think at this point the market is going to have a hard time going higher and this was the
primary goal of the Fed to produce a wealth effect for spending.

Clearly the high end retailers have done well but not the middle income and lower income and associated retailers.

We were used to a fed who said something and stood by it for at least a short time now we see the fed can and will turn on a dime...
And they are on a path that will cut the QE down 10 billion per month..
So in 90 days they will cut it down to 25 Billion
In 150 days to 5 billion..
I say well well before they reach that number that is within 90 days they will announce
a delay of the taper because the little growth we see is from this artificial money
This will be triggered by a weak stock market and negative retail sales as the QE gets drained out
of the hands of the upper middle class who was doing the spending..
They will cut at least 1 more time this month maybe 2 months but that will be it.
So if you are going to get the correction you expect, it will have to happed very soon in next 60 days,
if not it will be up, up and away.
I think smart money knows this already and is why gold price is hanging around here and won't fall easily and recovers when it does. For me I would rather take the 30% drop as it would be short lived then to have it soar suddenly upon Fed recanting on the taper and lose the first big surge.
Lets see if this plays out as I think it will.

April 18, 2014 | Unregistered CommenterMark

Hi Bob,

I read your article. Although I agree with most of your analysis. I would like to know if you your portfolio
is mainly in cash in which currency then? Clearly currencies are a real tricky asset to owe , just read
the history. I would say a healthy and majority of ones capital should be invested in times like this
in hard assets. At least you sleep much more relaxt this way.

best regards,

Pieter

April 18, 2014 | Unregistered CommenterPieter

Bob:

It is very possible that there may be a slight down-move in precious metals (PMs). On the other hand, we are looking at a 2 to 3 year PM bull ride. No sense not getting on the PM train at this point; there’s not a lot to lose unless the PM train pulls out and you’re still waiting for the bottom.

I’ll be buying things like JNUG next week. You may want to consider such buys also.

April 20, 2014 | Unregistered CommenterBud

Bob,
I enjoyed your recent bit on gold, however, you failed to note (an oversight, perhaps) that the prices of the precious metals are manipulated by 4 major banks. They hold an illegal number of SHORT positions and at every rally, beat it down with short contracts. They sell every rally in a way that no "for profit" seller would.
Their actions cover the dollar's rear end and if gold and silver were allowed to move in the free market (read: instead of managed by JP Morgan etc) they would be MUCH higher.
I've been a student of the movements and the 4 banks management scheme for about 12 years now....This is well documented, but even after Bart Chilton claimed to have investigated the manipulation for 4 years, he could not bring himself to assign any wrongdoing.
If you really want to win the Pulitzer, dig into this one and tell the whole story.

April 21, 2014 | Unregistered CommenterBill

Bob
There is no evidence gold reacts to anything and certainly not us centralised money policy.
From the day Issac Newton fixed the price until tricky dickie loosened his belt the gold price did nothing other than respond to the opium wars which lead to the massacre of 20m Chinese and many more by starvation. At that point the oriental ha hordes of gold and would sell to the west but not purchase goods.

Sure the Chinese have a bit of pent-up desire at present but this is a race to the bottom. The event that triggered the latest drop is the failed merger of Barrick and Newmount.

At around $us800 per oz of Au these companies can no longer continue to produce gold and the theory is one ceases or go broke and the other then potentially survives. If they merge then the pressure point is reduced slightly. The Russians are rushin to sell some gold before the inevitable collapse but are in fact increasing the pressure on collapse of the price below $us1000.

It’s a case of supply and demand…supply, there has never been more gold available…demand ,it is very price sensitive.

Gold is in a price fall and will end the year lucky to hold $us1000.With global economy set to commence recovery via 2016/17 the news is it its doubt full the future is anything but grim for gold prices. Then as the Baby Boomers give way to gen x its doubtfull gold will avoid Lord Keynes prediction of it being an historical relic.
I wish it was not thus.
Regards
John

April 23, 2014 | Unregistered CommenterJohn

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