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.
Red has been the color of choice for gold and silver this week. On Wednesday, gold fell below $1,600 to close at its lowest level since September. Meanwhile, silver fell below its $30 support level. Although many were quick to declare the bull market in precious metals dead, many investors questioned the call, because the long-term fundamentals have not changed.
Investing in precious metals takes discipline, patience and nerves of steel. Sharp pullbacks, as in the price movement seen this week, are nothing out of the normal for gold and silver, especially during a liquidity crunch. In October 2008, gold declined from $900 to $712 in a matter of just two weeks, representing a decrease of 21 percent. In the same period, silver fell from $11.75 to $8.90, representing a 32 percent fall. However, this did not change the long-term picture, and precious metals went on a multi-year surge after central banks stepped in to provide liquidity to an insolvent financial system.
Investor Insights: Is Gold’s Bull Market Over?
Wednesday’s pullback in gold caused the gold bubble claimers to also point to the 200-day moving average as evidence of a bubble pop. For the first time since January 2009, gold fell below its 200-day moving average. However, a cherry-picked technical support level does not justify a change from a bull market to a bear market. Gold advocates can just as easily point to gold’s 300-day moving average as a counter-argument. Going back to 2001, gold’s 300-day moving average has offered strong support to the ongoing bull market numerous times. However, gold broke below the 300-day moving average in August 2008 and stayed there until January 2009. It has been above the 300-day moving average for all but three days in April 2009 since then. The fact that gold fell below this longer-dated moving average support level did not deter investors in the long-run. Gold investors hold the precious metal as a hedge against fiat currencies, not because they trade above or below moving averages. As Kyle Bass explains, “Buying gold is just buying a put against the idiocy of the political cycle. It’s that simple.”
Gold’s recent fall below a moving day average will not discourage gold investors. The factors leading to the precious metal bull market are still in place. Central banks and governments around the world continue to reduce interest rates and try to solve the global debt crisis with more debt. In the U.S., the Federal Reserve has held interest rates artificially low for years, and continue to pledge record low interest rates till at least mid-2013. Pimco’s Bill Gross, manager of the world’s largest mutual fund, believes the Federal Reserve may keep their current zero interest rate policy until 2016. This is bad news for savers, as inflation will exceed the yields on savings accounts. Precious metals began their latest bull market in the early 2000s when Alan Greenspan dropped interest rates to stimulate the economy after the tech bubble. With Ben Bernanke keeping interest rates even lower, there appears to be years left in the gold bull cycle.
