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!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add 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:

  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...
  • A Bumper Under that Silver Elevator – Precious Metals Supply and Demand
      The Problem with Mining If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).   As this book attests to, some people have a very cynical view of mining...  We would say there is a time for everything. For instance, when gold went ...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • The Knives Come Out for Trump
      A Minor Derailment GUALFIN, ARGENTINA – Yesterday, stocks fell. And volatility shot up.   When too many people have too many knives out at once, accidental cubism may result   Reports Bloomberg:   The Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe. Major U.S. stock indexes...

Support Acting Man

Austrian Theory and Investment

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