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Metals Down, Miners Up — What It Might Mean

by John Rubino on May 9, 2012 · 27 comments

Gold and silver are down again today, but the mining stocks are up big. One day does not a trend make, but this is still a possible indicator of several things:

1) The plunge in mining shares has finally gotten the attention of investors who understand that most of these companies are viable and profitable, and that they won’t go to zero. So at some point the downtrend will stop, and though today might or might not be that day, it’s definitely coming. Downside risk, in other words, is now smaller than upside potential.

2) Share buyers are watching the mess in Europe and concluding that austerity is being replaced with monetary and fiscal ease. The European Central Bank will have no choice but to buy up trillions of euros of peripheral country debt to keep the eurozone together — or the currency union will fall apart and former members will go back to their old currencies and devalue aggressively. Either outcome is inflationary and therefore great for precious metals.

3) Gold miners are outperforming silver miners, which means investors are going for pure monetary protection rather than the growth/inflation play that silver represents. They’re betting on chaos, which is pretty reasonable at the moment.

Tagged as: euro, gold, inflation, mining stocks, silver

Marty

Could you address in your next piece the absense of the individual investor in both the Ag/Au miners and the metals in general. The general investor is broke and looking only at his next mortgage payment, and more than likely has taken a loan against his 401K. So you really only have a select group of investors near the commodity space who for the most part are shaking in their boots concerning everything.
- Doug
  
  I agree with David – but there is fear, particularly with the steep corrections in metals recently. I think stock market losses will drive people to metals at some point, more than offsetting those who took out loans against their 401ks. The beauty of the metals markets, however volatile, is that less than 1% are invested in it. Counterparty risk and inflation fears will raise that figure substantially, IMO.
  - Doug
    
    Let me correct “stock market losses” in line 2 above to “losses of money relative to inflation in stocks or fixed income investments.”
http://www.ThisBloodlessLiberty.com David M. Zuniga, P.E.

Marty, I don’t think we’re all shaking in our boots. Some of us paid off our mortgages long ago, never had a 401k, and invest (moderately!) in silver and gold not as a hedge but as a long-term strategy.

We don’t shake in our boots because the crash of a system built on force and fraud (since 1862, not Bretton-Woods) was inevitable. You scrimp and save and plan, and then you can rest when others are running around with their hair on fire.

I don’t mean to sound smug or superior. I’m not wealthy by any stretch; just positioned for extended ‘bad times’ as America recovers from 150 years of criminal money and banking, and 90 years of private-sector binge partying that never made sense.
- http://laconfluencia.com mark
  
  exactly.
  most of this fussing and whining seems to come from those who were perfectly content to watch home values increase yr after yr until 2006. now, suddenly, they’re all screaming “foul” and joining OWS protests.
  and if those who tended their gardens while sitting out the high times of the 90′s / early 2000′s are now feeling a little smug…well, they’re entitled to it.
Susan

Not sure where you are getting mining stocks are up because my GG mining shares are down down down.
- fallingman
  
  GG rebounded hard today in the face of lower gold prices. But yeah, it’s been down hard lately, because they’re having trouble with the permitting process for El Morro in Chile. Ditto for their partner in the project NGD. It’s one of the things that has helped drive the GDX and HUI down even further in the last week.
  
  From my point of view, I say big deal. Delays are fine, Keep the ounces in the ground. They’ll be worth a lot more later. I can wait.
  
  GG is a keeper.
paper is poverty

Could some of the buying today be due to technical factors, i.e. this is the first time the HUI has opened below 400 since 2010? Individuals may throw in the towel as bottoms are reached, but hedge funds and other professionals are smarter and wait for low prices to buy. I could see where an open or close below 400 on the HUI could trigger buying of major HUI components, but that’s totally a guess on my part. I note that although the XAU technically opened a hair above 150 it immediately went below that (in fact, below its 52-week low); again, 150 is a round number and you wonder if there were any algorithms or buy orders that look at these indices. GDX also opened very near its 52-week low, while GDXJ and SIL opened below 20 and below their 52-week lows.

This is way beyond my expertise… it’s just a thought. I’ll be interested to see whether the divergence holds or whether this was just due to some sort of mining stock buying trigger.
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http://www.TomBlairEA.com Thomas Avery Blair, EA

I have no good reason to trust “fiat” currency, especially the Federal Reserve “Notes”, sandwich coins and electronicly-generated “smoke and mirrors” money-because-the-government-says-it-is.

I never have trusted banks, politicians or Wall Street. I disposed of my real estate residential holdings, stayed out of debt, paid only those creditors deserving my hard-earned “greenbacks” and eliminated any and all risk of having my identity stolen (my FICO remains below 450 and I’m proud of it).

Being the contrarian that I am, I still enjoy hearing the tinkling of a pre-1965 90% silver content U.S. minted precious-metal circulated coin and fully intend to do so until someone kills me in an attempt to deprive me of it.

I believe in survival. I put my faith in my God, my silver and my shotguns.
http://none marvin simmons

GOLD HAS HAD IT
NEXT BUBBLE WILL BE IN 20 YEARS L00K FOR $1000 GOLD
FIRST YEAR GOLD WIIL CLOSE LOWER IN 11 YEARS FOLLOW 1980
- http://www.myronswinningjuniors.com Myron Martin
  
  Mr. Simmons: There is merit in being a contrarian in some situations, and maybe you are doing so only to attract attention as it certainly is not based on any viable facts. I suggest you do some serious research comparing the loss of purchasing power of fiat currencies over a few decades compared to the resurgence of gold as REAL and dependable purchasing power money.
  
  I would sure like to know on what basis you are calling a top in precious metals when multiple nations are technically bankrupt as are many banks?
  The FACT that many Central Banks around the world are adding to their reserves of gold as opposed to selling as they did many years ago. Where is the basis for gold dropping to $1000. when DEMAND is increasing and mine supply is not keeping pace? While everybody is entitled to their opinion, and opinion is just that, and only as viable as the facts on which it is based, and you haven’t offered any.
  
  Give me a couple reasons as to WHY the masses will suddenly have their faith restored in corrupt politicians and irresponsible bankers and want to hold “paper promises” of liars and cheats instead of REAL MONEY?
william wallace spawn

All,

I would recommend getting some Canadian and Indian currency and possibly some Iraqi dinar. I talked with a Gulf War Veteran and during the 1991 war they stocked up on Kuwati currency. They are currently living like kings!
KrystalLow

Please add me to your free subscriber list
W G Thompson

The miners boomlet might be something as
simple as a “fire-wall.” Many of
these mines are in foreign countries,
and thus beyond Obama’s reach. Others
have offices in Canada, but mines here
and there, notably in S. America.
It smells like diversification to me.
Let’s hope it’s a groundswell. WGT
Jason Emery

Seen this exact same price action 100 times in the last 10 years. There is only one logical explanation. The folks in the know start shorting gold stocks at the top. They know it’s the top, because they are buying bullion at the same time.

Then they reverse their gold futures position, liquidating long positions and piling on Comex shorts. As Comex gold drops, they gain two ways. Both their Comex contracts gain, and their gold stock short positions gain.

They continue to short bullion at the bottom, in order to get out of their gold stock short positions easily. Most rubes are scratching their heads, wondering why gold stocks are going up on a down day for bullion. Once they have covered their gold stock short positions, they start buying bullion. This is why gold stocks usually lead the metal at major turns.
http://www.westcoastladybugs.com RUSS SMITH

Hi!, Patrons Of Dollar Collapse.Com Et Al:

Inflation has always been a mnetary circus with the Pavlonian Monkeys grasping @ FREE bananas & coconuts!
Top awards for the most devalued currency goes to the Hungarian Pengo by which the Hungarians were forced to resort to an accounting system based upon light years. Bananas & cocunuts were both priced out of the reach of most Hungarian Monkeys and those who could afford them still ate very few. Scratching for fleas on the other hand was rampant.
Daniel Webster was aware and so he wrote: “Of all the contrivances devised for cheating the laboring classes of mankind none has been more successful than that which deludes them with issues of irredeemable, fiat, I Owe You Nothing paper money!” Paper money first invented by the Chinese has brought about the destruction of more civilizations than that other famous Chinese invention: gun powder.” In the German Nightmare Inflation we can read: “A loaf of bread finally sold for more than 300,000,000,000 German Marks!” One of America’s most famous philosophers, Bertrand Russell, once commented: “Why do Americans depend upon their politiical leaders to solve their problems when the politicians ARE the problem?”
Anyone devcisively oriented to persue this subject more intimately should go to the Von Mises Institute Website and scroll until they find their 70+ page expose titled “Fiat Money Inflation In France” by Andrew Dixon White the co-founder of Cornell University. They also sell a paperback copy for around $10.
This treatese will explain how the inflation came; what it brought and how it ended. It ended when Napolean sent an emmisary to the French Ministry explaining that either they would supply him with gold coins in replacement for the constantly depreciating French Assignants or Napolean & his troops would be leaving their French battlefields so the French Ministry could fight its’ own battles. Needless to say Napolean received the gold coins he requested. What would happen here in America, if all our military personel demanded payments of their respective saleries as gold coins in substitution for OUR present fiat, I Owe You Nothing Federal Reserve Notes?
Article 1; Section 10 of OUR US Contitution calls for only specie gold and silver coins to be circulated among all of us citizens which would mean that the Colorado, New York & Fort Knox, Kentucky gold depositories would have to give up their hoards to the US Mint for the production of FREEly mintred gold coins free from irigination interest as is charged for our present paper money via interest bearing bonds and distributed to all US citizens @ OUR Governments’ present gold price of $42.22/troy oz. Then we needn’t wonder how much gold is in any of these repositories, because the metal would be in OUR collective pockets from generation to generation wouldn’t it? That’s the real world way to account for OUR money isn’t it? Henry Morgan, Sr. told Congress: “Gold is money. All else is credit!” Today, that’s all our nation is living on is credit isn’t it with deficit spending and bailouts at every curve of our rocky economic road? Gresham’s Law has sent the pre 1965 silver money into hoarding/hiding hasn’t it and no Congress has ever repealed the outcome inherent in Gresham’s Law anymore than they can change the coarse of the Law Of Gravity.
The experiment with the French Assignants placed in jepardy 5 generations of young Frenchmen who were sent to fight in foreign battlefields. They didn’t need jobs and they were constant/consistant consumers of commodities. Can we immagine 5 generations of our youngest and brightes young men facing this same fate without recoarse, so we can be distracted from keeping the edicts inherent in OUR US Constitution. Will it be worth it?
We see such a large need for jobs here in the US but the jobs were created, prior to OUR great government taxing many of our major corporations out of business domestically causing them to relocate to foreign ports where they found ample employees willing to do their jobs @ much cheaper rates that helped them capture greater profits especially utilizing more favorable tax rates to boot than they could ever achieve domestically. The loss of jobs aspect afflicting our economy covers all political spectrums doesn it no matter who occupies the White House etc.?

RUSS SMITH, CALIFORNIA
resmith@wcisp.com
Robert

“Article 1; Section 10 of OUR US Contitution calls for only specie gold and silver coins to be circulated among all of us citizens which would mean that the Colorado, New York & Fort Knox, Kentucky gold depositories would have to give up their hoards to the US Mint for the production of FREEly minted gold coins’…
Aye, that’s the rub- for the fact is that what the Fed (and every other stinking central bank) has been doing since 1913 is, in exchange for what has appeared the somewhat bewildering extension of trillions in credit, is to establish ownership- for themselves, non-governmental private entities, ownership of what we like to think of as “our” or “the people’s” gold in Fort Knox, West Point, wherever. And lest anyone think they are not in it for themselves, they tried to refuse a Judicial Watch Freedom of Information Act demand for documents on the ground they were NOT subject to FOIA- a claim that was rejected by the courts. The trillions in “Quantitative Easing” have gone, virtually interest-free to the very banks which own the Fed (and other CB’s)- no usury laws apply when they charge their own customers interest at a rate 1000% that they pay their savers.
http://www.silverstealers.net Charles Savoie

Investors worry about their mining shares. If you missed the action, more will come. Sell into strength, buy on weakness. If shares don’t confirm bullion prices, sell if apparently at a peak. Don’t forget trailing stops. Many with profits convert it to hard metals. Beware—metals concentrated in vaulting facilities of any type invite sudden government seizure. This applies in all countries. Concentration invites seizure. Dispersion discourages it. If still relying on vault operators for storage, ask them how are they protecting themselves from risk of relatives being kidnapped as leverage to open the vaults to “ordinary” thieves! Your metal is more important to you than vault operators income!
Pingback: Metals Down, Miners Up — What It Might Mean
Rosco1776

I’ll keep buying silver and lead with my fiat paper as long as I can. The low is nothing but a greater buying opportunity for me. It’s a store of value, not an investment.
Bruce C.

Regarding point 1: “Investors”, whoever and whatever the are, are also realizing that the capitalization of the mining companies are roughly at, if not below, liquidation levels.

Regarding point 2: Some (or probably still most) investors may be considering gold and gold miners to be just inflation plays, but some may be realizing that gold is quickly becoming the “new” reserve currency so demand will increase, etc. etc.

Regarding point 3: Evidently most investors are still considering silver to be an industrial metal and are treating it as any other commodity. Even those that don’t need to consider that silver is only a mining by-product of other metals, so when the demand/profitability of other metals drops so does their mining which means less silver will be extracted as well. Silver is a more complex metal to analyze. Relax and be patient.
scott

this current swoon is nothing more than another ‘deflationary episode’ on the road to ruin. we’ve been in a financial war now for at least 45 years, since the London Gold Pool days…..Gov’t + Central Banks v free market. the free market wants deflation: all this debt worldwide eradicated [written off]. Gov’t + CBanks want inflation: all this debt worldwide monetized. if the deflationary forces win, our “Masters of the Universe” [Gov't + CBankers] will lose all their power to run things. do you really think they’re gonna allow that….to go meekly like a fart in the wind? if you do, then sell your gold / silver. if you think they’ll do whatever it takes to retain their power [this includes more draconian laws], then BUY MORE. these people aren’t gonna disappear; they’ll do whatever they can to enhance and grab more power for themselves….this is human nature. debt monetization is and will be the ‘order of the day / year / lifetime’. jpmorgan just reported a $2 billion loss from derivatives trading…..this, the retreating price of oil / gasoline and the retreating gold price are all indicative of a ‘deflationary storm’ below the surface; this will only be dealt with by more QE [debt monetization]…..or their system dies. now logically, which course do you think they’re gonna take?
http://usabaygreen.com Cathy

Go straight north till you cross into Maple Leaf land that is a good place to dig/mine,etc. The permit time is amazingly different than in Obama Land where if you apply for a permit all nice and legal like you will be lucky to be able to excavate in about 7 years and then another say 2 or 3 years to start making a profit if things go as planed which never due. But at least in Canada you can on average save 5 years so why does the US like to let you get 5 years older surely the tree hugger paper work must generate a lot of people checking other people’s paper work who could possibly be so efficient, if the Democratic Obama Senate has been breaking the law with no budget for the last 3 years do you think if Obama would even consider them having to make a budget or would he extend the time longer to slow down the mining process, which in the long run pushes the price up for lack of supply how smart is that at getting your monies worth, China loves his 40 cent to the dollar theory with a little bow down on tv for all to see. Get your Obama investment kit when the health care hits insurance companies should be a good stock now that is Gold derivatives.
http://independentstockanalysis.com JJ Butler

Two remarkable features of this gold bull market have been the lack of volatility and how the bullish fundamentals seem to continue outpace the price of the bullion.
Gold bottomed at a depressed price of $250 at the end of a two decade bear market. Since then the credit bubble has grown immensely. The Fed induced housing bubble was only the largest part, now dwarfed by government debt. ZIRP? TARP’s, TALF’s and a myriad of other acronyms? Does anyone else think the student loan bubble gets monetized this decade? QE1, QE2, Operation Twist, now talk of seeming expectations of QE3 soon enough. Does QE to infinity sound funny to the non-goldbugs anymore? Rather than suggest gold has discounted anything, consider gold could be more fundamentally undervalued now than at any time since Nixon closed the gold window!
P

This is excellent! Bravo to all of you for your insight and comments.

I would love to see a debate on the 5 most undervalued miners.

Im thinking ssri, hl maybe, Kinross?, EGO?
Pete

Wish my mining stocks were up. I own various shares in stocks and stock funds:

Tocqueville fund, great panther, endeavor, romarco, and rubicon. Overall, I’m down about 33% in 12 months, but the allocation is not equal which may skew the numbers one way or another.