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 Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • A Falling Rate of Discount and the Consumption of Capital
      Net Present Value Warren Buffet famously proposed the analogy of a machine that produces one dollar per year in perpetuity. He asks how much would you pay for this machine? Clearly it is worth something more than $1.00. And it’s equally clear that it’s not worth $1,000. The value is somewhere in between. But where?   We are not sure why Warren Buffett invoked a money printing machine of all things – another interesting way of looking at the concept is by e.g....
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

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

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com