Pressures on the Gold Sector – Sentiment on Gold

In our opinion, there are three major reasons why gold stocks have – so far – failed to properly reflect the recent recovery in the gold price. The first one is that many market participants have become convinced that gold prices are now set to go lower. We have recently written about the CoT report; last Friday the newest report was published, and small speculators have now gone net short gold futures for the first time since the late 1990s bear market. What is remarkable is that they have attained this net short position while the gold price has continued to rebound. Admittedly, the rebound doesn't look very convincing on a daily chart; it looks like a bearish flag, hence the continued propensity by speculators to add to shorts, respectively liquidate long positions. However, the  bedrock of large speculator net long positions which we have also discussed in above mentioned article remains intact, and what we said on that occasion continues to apply: it would be a bad sign if that were to change.

 


 

Gold CoT
Gold, commitments of traders: small speculators are now net short for the first time since the late 1990s – click to enlarge.

 


 

Gold, June Future
Gold, the June futures contract. The rebound looks like a bearish flag, and anecdotal evidence suggests that even gold bulls are convinced that the recent lows will have to be retested – click to enlarge.

 


 

Judging from anecdotal evidence – which has to be taken with a grain of salt, but shouldn't be dismissed out of hand – even most prominent gold bulls expect that the gold price will at least have to 'retest' the recent crash lows. They may well be right, as this is what usually happens after a precipitous decline. Prices eventually revisit the lows amid lower trading volume, and if they reverse back up, the retest can be considered successful. The 1987 crash in the stock market provides a good example:

 


 

DJI,1987 crash
The DJIA in 1987: crash, rebound and retest of the initial low – click to enlarge.

 


 

Keep in mind though that if a majority believes things to play out in a certain manner, the market has a habit of complicating things by defying such expectations. Whether that will happen in this case remains to be seen.

 

 

Weak Earnings and Downgrades

The second reason is the fact that most of the earnings reported so far have once again been weak (i.e., they came in 'below expectations'). Tied in with that is reason number three: now that gold stocks have already declined by about 60%, a great many sell side analysts have collectively decided it would be a good time to slap downgrades on them. To be sure, there have been a number of analysts who have acted in more timely fashion in downgrading the sector, but for the most part the usual herd behavior could be observed: they upgraded many stocks after they had risen a lot and now they downgrade them after they have already collapsed, i.e., when it is sure to help absolutely no-one anymore. Over the past two weeks it hailed downgrades on many gold stocks, which has contributed to their inability to put together a half-way decent bounce.

However, as the late 2008/early 2009 period most recently demonstrated, such clusters of downgrade action are often a contrary signal. Once stocks are rated   'hold' or 'sell' across an entire sector by a majority of analysts, the pressure from that source can no longer get any worse. Moreover, whenever analysts are herding and believe only one outcome to be possible, they are usually wrong. We would rather trust the opinion of insiders, as they are putting their own money at risk. As far as we can tell, analysts risk nothing by being wrong, especially when the entire herd turns out to have been wrong at some point down the road (there is safety in numbers). A recent example for how wrong they often are when their opinions are unanimous were the 22 'strong buy' ratings and the lone 'sell' rating on AAPL when the stock hit the $700 level.  By the time the first rating changes were contemplated, the stocks had already lost $250.

 

Mining Costs

Apart from the fact that everybody now 'knows' that gold can only go down further, one of the things that are apparently being extrapolated indefinitely into the future are rising mining costs. However, as this recent article at Seeking Alpha suggests, this view may actually by misguided, as many major input cost items have stopped going up further or have even begun to decline.

There are a number of reasons to believe that this trend might continue. For one thing, recent weakness in commodity prices has caused many mining companies to shelve expansion projects or delay them considerably – often coupled with plans to downsize new projects and lower the associated capital costs. Regarding gold specifically, its real price (or purchasing power) tends to rise during times of economic weakness and/or declining economic confidence. A long term chart of the gold-CRB ratio shows that in spite of its recent decline, gold actually continues to sport very high purchasing power in terms of commodities:

 


 

gold-CRB-10year
Gold relative to the CRB index over the past 10 years – click to enlarge.

 


 

The prices of a number of items that are quite important for mining continue to be rather high however, as e.g. the chart below shows, which we have taken from the above mentioned article at SA:

 


 

tires
Prices of truck tires have risen relentlessly since the year 2000. However, since late 2011 they have begun to move sideways – click to enlarge.

 


 

Truck tires are an important input cost for large scale open pit mines. Many of the large scale/low grade open pit mining projects currently in the development stage are undergoing revisions in light of higher initial and sustaining capital costs. E.g. Kinross has scaled down the size of its Tasiast mine development and has delayed development in order to identify ways to improve project economics; it is just one example of many.

Miners of base metals such as iron ore and copper also have to contend with lower prices for their products and an increasingly uncertain outlook due to the  recent decline in China's reported growth rate. Given the dubiousness of Chinese economic statistics, it is a good bet that actual growth is much lower than reported growth. While the extent of the discrepancy cannot be ascertained, one thing is certain: marginal demand for copper has definitely declined.

LME warehouse stocks have recently reached a new high, above the high recorded at the peak of the 2008-2009 financial crisis. What is very odd about this is that it coincides with strength in global stock markets this time around. Usually strong increases in LME copper inventories have gone hand in hand with declining economic confidence  – the previous inventory peaks have been associated with the trough in stocks in 2009 and with the two major flare-ups of the euro area debt crisis.

In any case, whatever the reason for the current dichotomy may be, the fact remains that many copper mine development projects will probably be delayed as a result. In the future, cost pressures should therefore ease.

 


 

lme-warehouse-copper-5y-Large
LME warehouse stocks of copper over the past 5 years. Previous peaks have tended to coincide with falling economic confidence and falling stock prices – click to enlarge.

 


 

Conclusion – Real Gold Price More Important Than the Nominal Price

One thing one must always keep in mind is that nominal gold prices are not  really relevant to the earnings of gold mining companies. What is relevant is the real price of gold, or the difference between their input costs and revenues. The best gains in gold stocks occurred early in the bull market when the world fell into recession in 2000-2002.

At the time, nominal gold prices rose very little compared to the prices of gold mining stocks. What drove stock prices up was the rise in the real price of gold. Nominal increases in the gold price may have a supportive psychological effect, but the market tends to produce the biggest rallies in gold stocks when gold's real price is rising or expected to rise. Much will therefore hinge on whether the idea that input costs will continue to stall or even begin to decline will turn out to be correct. Most analysts will probably miss the turning point, so it is best to pay attention to input costs and not wait for them to issue upgrades (those often enough tend to be more useful as sell signals). It is in fact possible that the turning point has already occurred.

 


 

HUI, all data chart
A long term weekly chart of the HUI index. The weekly RSI is at its lowest level ever – click to enlarge.

 


 

 

Charts by: Sharelynx, Sentimentrader, BarCharts, BigCharts, Kitco, Economagic


 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “Why Gold Stocks Remain Subdued”

  • jimmyjames:

    Gold limping along- reviling none of its secrets as usual-as Richard Russell said… gold always does what it should do.. it just never does it when we think it should–

    • JasonEmery:

      Jimmy–Check out the following chart: go to stockcharts.com, and put in $gold (spot gold) for the symbol, and look at about 6 months worth of daily prices, with candlesticks. What really sticks out, other than the 2-day price collapse, is the size of the candlesticks, post crash.

      Look at the size of the candlesticks, pre-crash. The vast majority had daily price swings (from intra-day top to bottom) of no more than $10 or $15.

      Now look post crash. The average candle is 2.5 or 3 times as big, although the candle size has shortened a little lately. It is quite apparent that ‘they’, whoever ‘they’ is, has decided to cap gold below $1500.

      Antal Fekete has written many times on the proper way to manage a gold mine. He says, if I recall correctly, that the very best ore should be saved for a rainy day, and as the ‘real’ gold price, as Pater calls it, rises, lower and lower grades should be mined, taking advantage of the opportunity to unload what would be submarginal ore at a lower ‘real’ price.

      My guess is that mines are not managed in that way, and a lot of mines will now be uneconomic, and gold share prices won’t rise too much if gold prices go sideways, or even rise a little.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • factoryA Striking Chart
      The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth.   What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson   Contrary...
  • trump-putin-1024Trump and Putin Narrowly Escape Assassination Attempt
      The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one.   The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
  • swing-voterWhy the Fed Destroyed the Market Economy
      What Have You Done for Me Lately? Swing voters are a fickle bunch.  One election they vote Democrat.  The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon.   The primacy of the wallet.   They don’t give a rip about questions of small government or big government.  Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care.  What’s important to the...
  • trump-mapDonald’s Electoral Struggle
      Wicked and Terrible After touting her pro-labor union record, the Wicked Witch of Chappaqua rhetorically asked, “why am I not 50 points ahead?”  Her chief rival bluntly responded: “because you’re terrible.”*  No truer words have been uttered by any of the candidates about one of their opponents since the start of this extraordinary presidential campaign!   Electoral map (note that the coloration may no longer be applicable...)   That Hillary Clinton is...
  • wallet-367975_960_720Janet Yellen’s Shame
      Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers.   In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
  • warren-buffett-gold-coinGet Ready for a New Crisis – in Corporate Debt
      Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on.   The new three dollar bill issued by the Apprehensive States of America.   We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
  • 4-ip-and-non-def-capital-goods-ordersThe Economy, the Stock Market and the Fed
      John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices.   The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
  • silkroadHanjin Marooning in San Pedro Bay
      Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years.  The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years.  In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations.   A map of the main ancient Silk Road - click to...
  • voltaireGreat Causes, a Sea of Debt and the 2017 Recession
      Great Cause NORMANDY, FRANCE – We continue our work with the bomb squad. Myth disposal is dangerous work: People love their myths more than they love life itself. They may kill for money. But they die for their religions, their governments, their clans... and their ideas.   Famous French hippie and author Voltaire. He wears the same sardonic grin in every painting, whether he's depicted at a young or an old age, doesn't matter. His real name was François-Marie Arouet; he...
  • wilsonand-morganThe Donald Versus Killary: War or Peace?
      War: A Warning from the Past Although history does not exactly repeat itself, it does provide parallels and sometimes quite ominous ones.  Such is the case with the current U.S. Presidential election and the one which occurred one hundred years earlier.   The Donald probably has the better slogan...   The dominating question which hung over the 1916 campaign was whether the country would remain neutral in regard to the horrific slaughter which was taking place on the...
  • hittite-leftoversA Rift in the Space-Time Continuum
      Weird and Unnatural NORMANDY, France – First, a quick look at the markets. The Dow bounced on Monday, recovering 239 points of the nearly 400 it lost on Friday. Why the comeback?   FOMC member Lael Brainard: her comments on Monday were touted as the “reason” for the stock market recovering half of Friday's losses. We suspect the real reason is the triple witching on Friday... Photo via twitter.com   The financial press has a ready answer: “Stocks gain...
  • ukraine-mapCrimea: Digging For The Truth
      Renewed Escalation This summer witnessed a renewed escalation between Russia and Ukraine after Russian President Vladimir Putin accused Ukraine of sending saboteurs to attack Russian troops, targeting “critical infrastructure”. Kiev denied the allegations and claimed Russia’s “fantasy” was nothing but a false pretense to launch a “new invasion”.   August 10: Russian president Putin announces that there was an altercation involving a group of Ukrainian saboteurs at...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com