Some Miner & Not-So-Minor Issues

Precious metals markets started the new week with a bit of a mixed picture last night in overseas trading. Spot dealings showed gold falling $2.40 to $1,640.00 and silver down a dime to $31.60 per ounce. Platinum and palladium each advanced $1. The US dollar climbed 0.14 to 79.28 on the trade-weighted index. Monday morning’s New York trading action opened amid intensifying waves of selling in the complex. The principal moving agent for the decline in metals was the dollar-oil trend.

Spot gold fell $19 (1.1%) after the opening bell and was quoted at $1,623.50 the ounce. Silver was bid at $30.82 per ounce, down 90 cents or 2.8%, after it broke a major support shelf at $31.50 in pre-opening action. Platinum dropped $24 to the $1,553 mark while palladium slipped $11 to the $663 level per ounce. Rhodium remained unchanged at $1,350 the ounce. In the background, the US dollar was up 0.40% at 79.53 on the index and crude oil lost $1.02 to ease to the $102.80 level per barrel. Copper declined 1.6% this morning.

The latest CFTC positioning reports indicate that hedge funds have slashed their bullish bets on commodities by the largest amount in four months in the week that ended on the 17th of the month. Such speculators appear to be exhibiting concerns that relate to the possibility that a synchronized global economic slowdown may be underway. The situation prompted one money manager to conclude that “conditions just aren’t favorable for a commodity rally.”

The weekend pledge by various nations to pump $430 billion into the IMF’s coffers is being seen by the spec crowd as basically an assistive measure for a faltering global economy. Signals coming from the world’s second-largest economy (China) indicate that not all is well given the slowest pace of expansion in circa three years. That country accounts for 40% of copper’s offtake and 11% of oil demand, globally speaking. The most recent metrics from China indicate that the country’s demand for black gold has fallen to the lowest level since last fall, while its manufacturing activity is slated to show a contraction for the sixth consecutive month.

The Sydney Morning Herald’s Business Day contributor Matthew Kidman notes several interesting aspects of a gold market that now has everyone (and their cousins) suddenly turning into self-proclaimed analysts. First, Mr. Kidman correctly underlines the fact that “there is not an analyst on the face of the Earth who can accurately value gold” since it cannot be based on conventional metrics such as ROA or discounted cash flows. Score one for Warren Buffett.

He then punctures the myth of supply/demand tables being in favor of (higher) gold by noting that “gold bugs like to say that the demand for gold is strong, but the reality is the supply of bullion far outstrips demand that is going to be the case well into the future.” Mr. Kidman also cautions that while gold used to be “traditionally a fear trade, gold turned into a greed trade after the crisis as the price marched higher.” Hello, hedge funds. Hello gold-investing newbies. The author reminds that “no matter how the story is dressed up, the price of an asset can climb for extended periods at elevated levels before mean reversion starts to kick in.”

And, while “this does not necessarily mean gold has reached that point, and looking at the charts there is a better than even chance it can surge again, Mr. Kidman advises that “what it does mean, though, is the end of the bull market is a lot closer than it was in 2001, and the downside potential is much greater than at any stage in the previous decade. In other words, the risk/reward equation is no longer in favor of the new buyer of the metal. Missing the final 25% of a bull market is better than sticking strong and watching your investment melt in the sun.” Mr. Kidman also advises taking a look (in the bargain-hunting sense of the word) at gold…miners’ shares as an alternative play.

From a contrarian angle at least, he might as well do so, since a quick glance at the sector’s “performance” is more than enough to commence shedding tears; gold producer stocks are coming in with their worst relative showing in over three years. The GDX, for example, is down 9.3% this year through mid-April (versus gold in the guise of the GLD up 5.6% in the same period). Here, in graphical (and graphic as well) form, is the ratio of the GDX (the miners) to GLD (the stuff they mine) for the aforementioned period:

 

Chart courtesy StockCharts.com

As someone wiser than yours truly said, “Something’s Gotta Give.” Whether that implies a $100-200 drop in bullion’s price tag or the GDX returning to some former semblance of normality (ratio-wise) is an open question, but one we may not have to wait too long to get an answer to.

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