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Get Ready For a Washout in Gold Stocks

What’s going on with gold stocks right now? Are they in a bear market and is right now a good time to buy? In a recent interview with Financial Sense Newshour, resource analyst John Kaiser covers a wide-range of issues related to gold and gold mining stocks. First, he addresses why it’s nearly impossible to make a profit mining gold right now:

“[T]he big shock that made the news last year was the capital cost and operating cost explosion that has been going on for the past five years…Nick Holland from Gold Fields last year put forth a statistic saying that every year the costs have compounded 10 percent; that’s substantially higher than the two-to-three percent CPI that we’ve seen during the last five years. So the problem for gold is if you had a project which was marginal at $900, you would think that today at $1600 it should be fabulously profitable. Well, in fact, if you compound the cost at $900, 10% for five years, that’s 60% higher, so all of a sudden you’re up at $1400-$1500. And Barrick dropped a bombshell in January when it said that its worldwide average total cash cost and that includes the depreciation of capex is $1500/oz. Well, we’re pushing $1500 today. That means it’s really impossible to make money mining gold at least with new projects.”

With the explosion in costs, John also explains how companies are now being forced to take huge writedowns, which is further hurting the industry. In general, he says “we’re probably heading into a dreary period between now and September where there will be a complete lack of interest in the resource sector and there may be some gradual capitulation selling where somebody says, ‘Well, I like this other stock here at 4 cents a lot better than this one here at 3 cents so I’m going to dump my entire position, capture the tax loss and reposition in this other one.’ That sort of wash-out I think we’re looking for in the coming months.”

Continue reading here. Full transcript & interview here.

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Calm Before The Storm

I think the miners are the place to be. I recently heard the investment advice that you should be greedy when others are fearful and fearful when others are greedy. Right now people are really fearful of gold mining stocks. As Peter Schiff says (paraphrasing), "don't look a gift horse in the mouth. Buy it!"

This warning

is about 6 months too late!
Already washed out! Most hated sector in the market.

Though a long-time gold bull...

...I am dubious about the miners. There's an old saying: a mine is a hole in the ground with a liar standing next to it. IHMO, the way to play gold is to own gold, not a company which may or may not own gold in the ground which they may or may not be able to extract profitably.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Physical demand must drive paper prices higher.

Physical demand is strong, but paper is being dumped. If physical demand stays strong, the paper prices have to turn around. At least that is what I keep telling myself. I've lost my shirt over the last two years in mining stocks.

Barrick is currently trading at a P/E ratio of 6.9 with a 3.27% dividend

Newmont is trading at a P/E ratio of 10.0x with a 4.36% dividend

IAMGold is trading at a P/E ratio of 7.0x with a 3.89% dividend

Hecla, Gold Fields, Eldorado, Coeur d'Alene, Pan American Silver, Kinross, and others are all trading at or well below book value.

A lot of these stocks look like extreme values right now. I wish I had waited to buy into the market until now.

We all want progress, but if you're on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive.

-C. S. Lewis

I think paper has hidden your real gains.

Price everything you have traded using the daily gold, silver and copper price tic.

Priced in gold and silver, then 1985, and now my home is worth more than double what remains on my mortgage. Maybe that why bankers are hoping to foreclose. Maybe they have buyers?

Despite the fact that my mortgage is triple it's original $FRN value.

In 1964, one silver quarter bought a gallon o gasoline for the mower. A dollar nearly filled the can.

Today that's $4.99gal priced in silver. It's $3.80gal inctax around here.

Fiat money not only looses value, but lies about how much.

Free includes debt-free!

Michael Nystrom's picture

Paper demand is inflated by all the phony FRNs

Exactly what Paul said.

Everything, and I mean everything is inflated on the bubble of excess FRNs. From the $4.00 latte at Starbucks, to the houses in DC, to the paper price of gold. Which, by the way, is set on futures exchanges which are leveraged to the hilt. I don't know what the margin rates are now for a single contract, but the leverage is insane. Something like 10% to control $100,000 worth of gold. Speculators can easily drive the price up with borrowed money, but when it starts to fall - look out. The crash will be calamitous.

How big is the physical market? How many are actually taking delivery? What are they doing with it? They've got to put it in a warehouse, and there are carrying costs just to store it: Not only the opportunity cost of money, but insurance plus rent for the space.

And considering that the dynamic has changed (thanks Ben) and money is now flowing into stocks and real estate, why would anyone choose to hold the physical if it looks like they can get it cheaper three months from now, or six, or in a year? It is dead money.

That is for the big players.

For the little guys like us, keep buying the physical gold and silver, a little at a time. What you can afford. Slow and steady wins the race.

The point of owning gold and silver is not to "get rich" but to preserve wealth. You made the money - put it into something that will retain the value.

Like taking strawberries and making strawberry preserves. The point is not to 'get rich.' The point is to be able to enjoy your strawberries that you grew this summer on a chilly autumn morning with your bread, butter and coffee. Mmmm. Yum. Not to mention for a deep, cold winter midnight snack.

The only way to make sense out of change is to plunge into it, move with it, and join the dance. - Alan Watts

Using Fiat money is like building with a rubber tape measure.

In my Urban Mining hobby I gather the poor man's metals. Copper, aluminum and steel. Ten years running a computer store, but I used to throw out motherboards! It was through the peak of to dotcom boom. Lying money is not terribly useful. I made bad choices because I choose to measure with a bad currency.

On the house, it was just luck. It was built in 1842 on a hill in the most beautiful county in Michigan. Soon the black locusts will bloom and the treetops will be cloaked in white while sweet scents float on the warm evening breeze.

When I head down to town all the new building have gigantism. The cars have gigantism. Boxes are big, bought at big box stores. Like Miles visiting the vegetable garden after his long sleep.

Gold, Silver and Copper are antimicrobial. It a great money even during a plague. Use it for spoons and cups or money. Trade value not disease. It's a characteristic of money never mentioned. "She was protected by a silver spoon,"

Strawberry and creme sprinkled with raw cacao powder eaten with a silver spoon from a silver bowl. Silver and gold add no taste to food and no germs either. Just lick it clean and toss it in the drawer. j/k.

Iiked Mike Maloney when he interviewed Ron Paul. Mike makes sense when he says. "I don't want gold, but right now I don't want anything else."

Notwithstanding bad stuff government does how bad would it be. Back in 1842 Sheriff Bishop and his family of ten made a life of it. For thousands of year before that Natives hunted and gathered in this river valley.

And the Feng Shui. The Dragon protects my back.

Free includes debt-free!

Michael Nystrom's picture

Always have a dragon at your back


The only way to make sense out of change is to plunge into it, move with it, and join the dance. - Alan Watts


Apr. 10, 2013, 5:46 AM

Goldman has advised clients to straight up short gold, with an end-of-the-year price target of $1450/oz.

Izabella Kaminska at FT Alphaville has the full summary of the call, which actually is a follow-on to a generally bearish call that the company has had all year.

This is an interesting observation

While there are risks for modest near-term upside to gold prices should US growth continue to slow down, we see risks to current prices as skewed to the downside as we move through 2013. In fact, should our expectation for lower gold prices continue to prove correct, the fall in prices could end up being faster and larger than our forecast, as aggregate speculative net long positions across COMEX futures and gold ETFs remain near record highs.

An interesting nugget is that holdings in gold ETFs continue dwindle.

Read more: http://www.businessinsider.com/goldman-short-gold-2013-4#ixz...

"Never be afraid to raise your voice for honesty and truth and compassion against injustice and lying and greed. If people all over the world...would do this, it would change the earth. "
— William Faulkner