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

 

results 

Year-End Fund Raising Drive

Dear readers, our year-end funding drive has become a “beginning of the year funding drive” as we have yet to reach our target. By now you will be familiar with the many advantages a donation can secure for you, which range from sounder sleep, to children including you in their songs, to potentially obtaining privileges in the afterlife (no guarantees, but it seems highly likely). Lastly, a special thanks to all readers who have already made a contribution, we are greatly honored by your support.

   

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:

  • goldmine-700x360Gold and Gold Stocks – A Meaningful Reversal?
      A Negated Breakdown There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.   Photo via genius.com We suspect that in it was...
  • 1790_AssignatInflation-Spewing Dragon
      Dovish Cooing from the Desolation of Draghi As Reuters informs us, on the heels of Mr. Draghi's somewhat “disappointing” attempt to assassinate the euro on occasion of the previous ECB meeting, the chief European printing press supervisor and certified monetary crank has decided to assure everyone of his ultra-dovish stance again on Thursday, by announcing that even more monetary insanity must be expected soon:   “Fading growth and inflation prospects will force the European...
  • sauvequipeutThe Bank of Japan – Ringing in the Endgame?
      Let's Do More of What Doesn't Work It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don't work. It is regarded as evidence that there hasn't been enough spending and printing yet.   BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I'm seeing? Photo credit: Yuya Shino / Reuters   At the...
  • The Lost Ice CubeAn Ice Cube for Gulliver
      Panic! 9,000 Billion Tons of Ice Lost in Greenland! Have you ever wondered why they called that place up north “Greenland” instead of, say, “Whiteland”? The reason is that at the time humans first moved there, much of the place was in fact green....as it was a lot warmer than it is today, when allegedly, we are shortly all going to be roasted due to global warming (those living in coastal ares are supposed to drown before they have a chance to burn for their carbon footprint...
  • eyes-1The FOMC Decision: The Boxed in Fed
      An Imaginary Bogeyman What's a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory? In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the...
  • To Hell in a HandbasketTo Hell in a Handcart
      $5 Trillion up in Smoke POITOU, France – Pessimism is a sin against God, said money manager Charles Gave. It suggests ingratitude. And a lack of faith. After all, this is God’s world. What, not good enough for you? That’s why we are always optimistic at the Diary. Things don’t always go the way we would like, but they always go the way they should. Yes, the world may be headed to Hell in a handcart… but it’s for its own damned good!   Mild surprise down in hell...
  • hollandeHollande's Socialist Wonderland
      Everything's an Emergency If memory serves, France remains in a state of emergency on account of the terror attack in Paris in last November. As terrible as terror attacks are, they are a statistically insignificant cause of death and injury in developed nations. It is also worth noting that the countries that seem most prone to suffering terror attacks are the ones that are most active in intervening militarily in foreign countries. This is probably no coincidence. Just...
  • iceberg_ClevengerUnsound Credit and Risk Assets – How Serious is the Situation?
      Loan Losses and Rumors We want to briefly comment on recent news about a rise in loan loss provisions at US banks and rumors that have lately made waves in this context.   The iceberg – an excellent simile for what we know and what we don't know... or rather, what we don't know just yet. Image credit: Ralph A. Clevenger   First though, here is a look at the Philadelphia Bank Index (BKX) as well as its ratio to the S&P 500:   Investors seem increasingly...
  • Super-Tall ScrapersSkyscraper Mania Goes Global
      New Skyscrapers Wherever one Looks Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom...
  • MW-BX052_FOMC_m_MG_20140319160153The End Is Nigh for the Fed’s “Bubble Epoch”
      Market Mythology LONDON – Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!   The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the...

Support Acting Man

350x200

Archive

j9TJzzN

Own physical gold and silver outside a bank

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