PM Daily Market Commentary - 8/19/2013

By davefairtex on Mon, Aug 19, 2013 - 11:49pm

Gold finished the day down -10.50 on light volume to 1336.40, with silver down -0.05 to 23.14 on average volume  The gold/silver ratio dropped to 58.99.  Early in asia trading, silver made a new high to 23.60, but was unable to hold its gains.

The dollar was more or less unchanged, off -0.06% on the day.

Copper also sold off - its first red day after 12 straight days up.  Oil was down as well.

Mining shares sold off again today; the volume was heavy, but not as heavy as during the preceding series of up days.  GDX was off -1.88% and GDXJ -0.90%.  It appears we've moved into a correction phase in the miners, not surprising given the rapid ascent of both miners and metal during the past 8 trading days.

If correction days have lower volume than the rally days, that's a good sign.  It says that big money isn't liquidating, although some traders are moving to cash after a decent-sized move up.  Of course, that could change tomorrow, so we have to keep reading the tea leaves for clues.

It looks like miners are underperforming the metal; perhaps during this phase they will correct more significantly, providing an opportunity for a lower risk entry point at some point in the next week or so.  A high volume down day in the miners that ends up getting bought - a hammer or doji candle - would be an ideal event for someone looking to buy.


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silver: while you were sleeping

There was a bit of a to-do during afternoon asia trading in silver.  Silver was hammered down about 80 cents, complete with big volume spikes, hitting a low of 22.28 before rebounding.  (22.16 was the breakout point for silver back on Thursday, which would be a natural support area for this kind of a "test").   In the seven hours since then, silver has recovered almost all it lost.  This is a good sign; we now have a low point where we know buyers will appear, and we also know that buyers really will appear when silver sells at a discount.

If silver can close the NY session today somewhere in the neighborhood of 23-23.20, it will print one of those hammers I like to see on the daily chart, which would be a definite bullish sign.  If it can't close above 23, then the likelihood increases of selling going forward.

Copper and oil did much the same thing, but with substantially less drama.  Copper recovered its drop, but oil did not.

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Encouraging to see this

Not the blatant attempt to knock $1 (or more) off silver in minutes; rather, the strong buying that reversed the slam


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Gold FLOODS out of London

As reported yesterday by Jim H, gold is flooding out of western countries to Switzerland.  This is the location of several refineries where it can be melted into other shapes and denominations, probably for sale in Asia.  This is one of those very significant "murkey undercurrents" in the gold marketplace.

From zerohedge:

and Reuters:

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GLD must have gold!

Well the good news is, if gold is really flowing from the ETFs, that means that the GLD ETF must actually have gold in it!

It certainly makes sense that as long as gold is trading at a premium to the COMEX price somewhere, then gold will flow to that place with the premium.

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The gold miners under-perform gold during a bull market.

Actually, I really want to frame my subject line as a question:

Do the gold miners tend to outperform or under-perform gold itself in a bull market?

I used to think that gold miners outperformed gold, as I had read it a few times on different PM blogs and also because Jim Doody of Gold Stock Analyst claims that to be true, and show some charts where it is true, at least since 2008.

But a few days ago, a childhood friend of mine, who now writes HFT algorithms for a hedge fund that does a lot of trading around the PMs agreed to look at some of my strategies for PM investing.  He saw that I had bought some miners with a small portion of my investment capital.

What he said was that over the last ten years, gold beat gold miners by a significant amount.  His comment is as follows:  (Note: You will see from this quote that I actually bought call options.  But, to simplify my question above, I'd just like to stick to discussing gold mining stocks vs. gold, and leave the options question aside.)

One comment on using call options to gain exposure to precious metals is

to remind you that over the 9.5+ year period between 12/31/2003 -

8/16/2013, the NYSE Arca Gold Miners Index (tracked by symbol GDX) was up

8.0% while gold was up 231.4%.  As I'm sure you're aware, there is a large

literature speculating on why this massive underperformance and there are

good arguments why miners may outperform gold in the future, however, this

is something you should consider.

Well, I had to check this out myself and indeed he was right.  Below I have two charts and the one that spans from November 2004 to the present does indeed have GLD beating the XAU and the HUI by over 190%!.  GDX would track pretty close along the HUI I think.  (Note: The reason I used GLD is because I can chart it in yahoo finance, whereas I can't chart the gold spot price.  But, one can see that for a financial instrument, GLD did a tolerable job tracking physical gold.  Over the last 10 years, GLD increased by 196% and gold increased by 277% in USD.)


Even from the lows of October 2008 to the present, GLD beat the HUI and the XAU by roughly 50%:

Now, it is true that the mining shares outperformed gold from the lows of 2008 until the momentum in the gold bull market slowed down in early 2012.  But, from October 27, 2008 to the present, gold stocks were down against GLD.  And this is a somewhat artificial starting date, as gold stocks had already fallen more than gold in the 2008 price crash, so that date already gives gold stocks a bit of an advantage.

So, I am now asking myself why I own mining stocks at all.  Should I just buy physical gold, or, if I want to trade options, call options on GLD?  For pension funds that do not allow me to buy physical, should I buy the best gold ETFs that I have access to as opposed to miners?

I would love to hear from anyone with any insight on the gold vs. gold mining stocks question.



P.S. Sorry about the fuzzy screen resolution in my images.  If anyone has tips for posting images on PP, I'd love to hear them.

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Addendum: GSA top 10 vs. the other mining indexes

This is an addendum to the above comment.  I was just reminded that the John Doody's top 10 gold stock picks have beat gold, according to his own chart, which is independently audited.  That doesn't mean that it will have this performance in the future, and it's even possible that the audit is not legitimate, but I expect that is probably a legitimately audited claim.  Here's the chart, and the source is the GSA homepage, a little ways down from the top.  -Hugh

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Mining stocks

The very reason to own mining stocks now is due to their dramatically poor recent performance.  They have been the most hated sector by far, and some of this has been derserved as energy costs (of mining) have ramped up, ore grades have ramped down, and the metals price has gone down (artificially to my mind). 

If you believe that Gold is going dramatically higher though, then there should be a multiplier effect for the miners.  You are buying Gold in the ground with miners.. future Gold. 

Think in simple terms regarding one of my favorites.. which has been acting really nicely of late;  SA

Seabridge Gold has about 45 million ounces proven and probable based on a recent report;

Their market cap is $1.44 Billion

How much are you paying for each ounce in the ground when you buy the shares?  $32.  

Yes, there are Geopolitical risks, nationalization risks, future energy price risks, continuing PM price manipulation risks.. etc.  Still, the leverage is obvious.  If Gold does what I eventually expect it to do, the miners will outperform it handily.           

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Gold Miner valuations


Gold miner valuations have been suppressed by several factors over the years.  If you believe that these factors are history and will not affect valuations going forward, then miners are a leveraged investment on gold.  That leverage is the potential reward for taking on the risks associated with mining, such as managing assets in foreign lands.  If you can stomach the volatility, then some exposure to the miners may be wise.  

The ugly history of gold miners:

- The cost of mining an ounce of gold has increased just as fast as the price over the last 8-10 years.  Byproduct credits for silver, copper, zinc and lead have reduced costs as their prices increased.  Wage, diesel, etc inflation has increased costs.  And the real interesting dynamic is that ore grades have declined dramatically.  Miners would produce 33% more today if ore grades were equal to those of 8-10 years ago.  And, that additional production would almost all fall to the bottom line.  

- Many gold miners used to purchase forward gold sales contracts to hedge their sales.  Barrick is the most notable.  Barrik wrote off over $5 BILLION in loses on gold forward contracts in 2009.  The major gold miners that I follow have all sworn off hedging sales.  Most hedge costs (e.g.diesel, foreign currencies).  There are rumors that the miners have started hedging again with the recent drop in gold prices.  Selling low and buying high.  

- Gold mining has a very high environmental cost

- Management turnover at many miners is high.  Critics claim that management rewards themselves before shareholders.

- Gold miners seem to have no market power and are 'takers' of the gold market price.  Perhaps DeBeers and OPEC could teach them something.

That's all for now.

Note that the increasing cost of gold production is very bullish for bullion.  Global gold production excluding China and Russia has been flat despite processing lower ore grades.  



Disclosure: I have been and am invested in a couple major gold miners for many years.  And, I am heavily invested in bullion.

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Thanks, Jim and Rik

I appreciate both of your responses.  I already own several gold mining stocks and in most cases, I will continue to own them for the foreseeable future.  But, it is interesting to see the large disparities between bullion performance and the performance of gold miner indexes.

Cheers,  Hugh

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