Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Today was one of the worst days the market has seen in a while. With widening sovereign debt concerns, the Goldman Sachs charges, BP oil spill and trade tensions with China, there is plenty for investors to be nervous about. Considering all of these factors and the weakening Euro — the profit taking, rush into dollars and weakening gold price makes sense in the short term. Precious metals investors were spooked by today’s decline and remain cautious of the impact a double-dip in stocks could have on gold and silver prices
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But today’s action in gold really wasn’t that bad. While the S&P 500 was down 2.4%, gold was down just 0.9% and the gold miners index (HUI) was down just 0.8%. According to Kitco, all of gold’s decline had to do with the strengthening dollar, as there was actually an increase in the gold price from physical buying. Additionally, the gold price advanced today across several currencies including the Australian Dollar, Brazilian Real, Canadian Dollar, Euro, Rand and Swiss Franc.
The Euro looks to be falling apart and these developments could certainly buoy the dollar for a little while longer and suppress the advance in gold. However, gold has demonstrated an ability to rise along with the dollar in the past few months and I think this trend is likely to continue. As was pointed out in the latest edition of the newsletter, the debt-to-GDP and deficit-to-GDP ratio in the U.S. is not much better than in many of the Euro nations that are facing downgrades.
Once the Fed begins to more aggressively monetize debt or the Chinese get tired of holding depreciating assets, the dollar is likely to face another swift fall. While deflation has been the dominant factor thus far, I expect the government to crank up the printing press if the markets show signs of dropping again. There has also been a great deal of currency created over the past two years that has been hoarded by the banks and could flow into the economy should the Fed stop paying such high interest on reserves. In the end, all fiat currencies are going to continue losing value versus gold, so the short term fluctuations among the various currency pairs will eventually prove trivial.
While precious metals may initially get taken down if the market sells off hard, this correlation appears to be weakening. We have witnessed several days over the past few months when gold advanced despite a declining S&P 500. While there will always be a knee-jerk reaction from investors to sell everything in a panic, I believe gold and gold stocks will snap back much faster than during previous sell offs. Rushing to cash (dollars) as a safe haven will become less and less prudent and investors will instead begin rushing into hard assets whose value can not be inflated away by irresponsible politicians.
Our timing was spot on with the booking of profits on three positions yesterday. If today’s action proves to be the start of a larger decline, I may look to reduce exposure and step out of the way for a bit. But when investors throw out the baby (gold) with the bathwater (mainstream stocks), it almost always proves to be an opportune time to buy the dips and add to positions on the over-reaction. In the meantime, I think it is prudent to hedge our long precious metals positions by shorting overvalued sectors such as we did with real estate this afternoon.
Sharp declines like today can be hard to stomach, but the long-term trend is undeniable. I am not convinced this is the start of the double dip that many have been anticipating quite yet, but I will continue to keep a close eye on the markets and continue making adjustments to the Gold Stock Bull portfolio accordingly. We may look to increase our short positions, but I remain confident that we will be able to find profitable trades no matter the direction of the markets.
