It has been a very hard year for the gold and silver bulls as this tiny sector has been sold off to an alarming extent by investors who are currently disillusioned by the demise of both gold and silver and the knock-on effect that they have had on the precious metals producers. Gold and silver have had a long run of ‘year on year’ gains and so the expectation was that 2013 should be more of the same. Alas, a correction arrived driving the precious metals down and decimating the price of a number of mining companies as the chart below clearly indicates.
The US Dollar
The US Dollar was expected to behave like the proverbial ‘Dead Cat’ in that it would fall from grace and not recover, instead it has hung in there, having dropped and tested the ‘79’ level no less than 5 times over the last year or so, only to bounce back to higher levels. As an investment it has outperformed the precious metals sector, not by making any dramatic gains, but by managing to maintain its value against the basket of currencies that form the US Dollar Index. Governments and central planners across the globe are engaged in some form of QE with the view to cheapening their own currency and hopefully boosting exports. This race to the bottom involves a number of currencies rendering it harder for the US Dollar to fall further. Some would argue that the dollar has outperformed precious metals by the default of other currencies and not on the strength of its own attributes. Never the less, it has outperformed making 2013 a year to be in cash as oppose to being fully invested in gold, silver or the associated mines.
Gold and Silver
Gold and silver have been in decline since hitting their all-time highs in 2011. A number of rallies have taken place during this trek south only to lose traction and fizzle out. We are aware that China is importing gold at record levels, that money printing continues unabated, the paper market does not reflect physical demand, etc., however, the trend is down. The trend is your friend as they say and until it changes we need to tread very carefully indeed if our wealth is not to be decimated. Timing is crucial to the success of any investment and as much as we like gold and silver, now is not the time to buy.
Gold and Silver Miners
One look at either the HUI or the XAU will tell you that this is a disaster area. The HUI stands at 197 today, down from a 2011 high of 625, registering a gut wrenching loss of close to 70%. For some companies the cost of production exceeds the value of the product they are producing. Many are engaged in an efficiency drive and cutting costs wherever they can in order to keep the wolf from the door. The perception is one of a battalion under siege fighting a gallant rear guard action, which begs the question; is this the place for my hard earned cash? Has this rout exhausted itself yet and are there now bargains to be had? The lows that were made in June were thought to be the bottom; however, the HUI has re-visited those lows and penetrated them, so the search for the final low goes on.
There are many alternatives to the investing in the precious metals sector which are doing very well. As we have mentioned, the dollar has been a better place to be this year. The stock market in general has made record highs bringing riches to many. The recent popularity of something that has been described as new gold; ‘Bitcoin’ is vying for our investment cash as a possible store of wealth and a means of wealth transfer. Is it a credible alternative, we don’t know, but it is getting a fair amount of air time and stimulating much debate. Then there is that old chestnut, monetary policy and the shadow of tapering which hangs over the precious metals market. The Federal Reserve meet this week so Ben Bernanke’s words may give us some clues as what they have in store for us going into 2014. We would not entirely rule out some type of tapering even as early as this month.
The gold market has been very kind to us over the last decade so we would like to paint a rosy picture for gold in 2014, but we regret that we just cannot see it yet. Gold and silver need to remain above the June lows and rally to higher ground in order to restore investor confidence. We suspect that this will not happen and that they will penetrate those June lows in a move that could lead to a ‘final’ capitulation; something that we believe is missing from this jigsaw.
We will keep our gun powder dry, watch and wait until we are absolutely certain that this bear phase is over before we return to the acquisition trail. We currently retain a bearish stance and we will trade accordingly until this bear goes into hibernation.
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In September 2011 the Gold Bugs index, the HUI stood at 630 as gold prices peaked, since then both have trended lower with the HUI losing about 65% of its value. The bottom has been called a number of times and after such a dramatic decline its difficult not to think that we are there now. However, as we all know the timing of any investment is crucial to its success and that is exactly what we are trying to do here, trying to pick advantageous entry and exit points. If you would like to know which stocks we are buying and selling please join us at ‘Stock Trader’ our premium investment service.
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