Gold Stocks End of Financial Year Sale – 65% Off!

by Barry Dawes

Key Points

  • Gold stocks 65% off April 2011 highs in End of Financial Year Sell Out
  • A$ Gold price 3% higher than April 2011
  • Tax loss selling period offers excellent entry point
  • Probable low in place in US$ gold prices
  • Major short covering rally likely
  • New highs still expected by 2016 giving notional 250% Index gains

The market place certainly has ganged up on gold and gold stocks these past couple of years and put them both to the sword.  “Barbaric relic” they say and, anyway, the gold mining sector is full of poor managers with third rate projects and a egotistical drive to spend money on more third rate projects or even, shock horror, exploration to increase resources.  Costs have risen out of control!  Lifestyle companies, so sack all the CEOs!  Stop spending shareholders money there and give us dividends.  Now!  Don’t you know that the global equity markets are only running on dividend paying stocks because interest rates are staying at zero and investors need income!

Well, all thirteen fund managers who still had gold stocks in their portfolios voiced their displeasure at the lack of earnings and dividends and the thousands who didn’t cheered them along anyway.  And those wonderful investment banks joined in with an orchestrated bear raid on gold and gold stocks. Yep, they knocked down the gold sector stocks 57% in North America and 66% in Australia in just two years.  And the US$ gold price then was US$1480 so is down about 5% from the April 2011 levels whilst in A$ it is 4% higher at A$1460 compared to about A$1400.  Go figure!

So gold stocks at today’s prices are indeed at bargain basement prices – don’t miss out of the June Sales!

Reviewing the long term history of the North American gold stocks (Philadelphia Gold Index “XAU”) it can be seen that it certainly is volatile and the past sell off has a manic character about it.  Sort of hate the sector.  Get me out!  And let’s short them because gold has no place in the low interest rate environment that is encouraging global growth.

So this price history shows that the index is back to the levels of almost 30 years ago despite gold being almost 300% higher.  And the reasons behind gold being in a bull market are still there.  Haven’t gone away and indeed are even stronger.

The momentum indicators on this index are deeply oversold and a rally is due.
The two major gold indices in North America (the “XAU” and the Gold Bugs Index(“HUI”))   are showing strong signs of reversal after their two year 57% falls.

Note the “gaps” in the break us from the lows.  Up 10.6% and 12.2% respectively from the May 20 lows.

And the two important ETFs GDX (almost the XAU) and GDXJ (gold juniors) are showing similar signs of bottoming with the same gaps and expanding volumes and up 12.6% and 15.6% from the lows.

And the actions of big two, Barrick Gold and Newmont, up 14.9% (up 20.8% from its April low) and 13.1% from the lows respectively showing strong performances as market leaders.

Spare a thought for the TSX venture Exchange Index (“CDNX”) where it with all its small cap resources and other sectors is down 61%.  But it seems to be bottoming and note the declining wedge being formed during the decline from April 2011.  A great deal of improvement is required in this index but a 16% upmove would trigger a very sharp rise and it has already rallied 5% from the lows.

Here in Australia the story has been the same only worse and we all know that as Newcrest fell 66% many other XGD stocks fell even more.  And we have also watched in disbelief as a few of our more speculative plays had a 9 in front of their falls.   Ouch indeed!  But if they have cash they should survive and their assets will eventually be recognised again.  Be careful but don’t despair.

The 66% fall by the Gold Index has been savage but note carefully that every sell off in this bull market since 2000 has been followed by NEW HIGHS!!!  In considering the state of the gold market itself I still consider that we will again see all time highs in gold stocks over the next couple of years.

The performance of gold equities against gold is even more extraordinary.  After spending over 20 years trading about 0.25 against Gold (left chart), gold stocks are now just 0.07   – less than a third of what they were.  The issue of PE ratios and dividend yield are different matters but the PERs are now almost single digit compared to 40s and 50s in the 1990s.

The picture is similar here in Australia.  After significantly outperforming both equities and gold itself we find gold stocks have fallen a long way.  Where was the gold boom?

So now let’s look at gold itself.

You have all been told that gold is dead along with inflation and that 2% yields on 10 year US Treasury Bonds and 3% on 30 year Treasuries are the places to be.  Just don’t worry about there being US$17 trillion of them and plenty more where they came from!

It is hard to pass by the obvious that the Treasury Bonds are being defended by US investments banks loaded up to eyeballs in these bonds and funded by the US Fed’s ultra low short term rates.   Sort of 1-2% “risk free” income and geared 100%.  Borrow short from the Fed at 0% and lend long at 2%.  Fine while rates stay steady and low.  Wildly leveraged when bond yields rise and bond prices fall.

Imagine the capital losses on 2% 10 year bonds should yields be forced to 2.5%.  Try 5-8%.  And 100% geared.  Goodbye banks’ balance sheets.   From the lows of 1.4% in July 2012 for 10 year Notes to Friday’s 2.16%.  From a price of 135 to 129.88 is a 3.8% capital loss and about 2.6% net of income loss.  On a million that is OK but on 10 billion that is 260 million. How many 100 billion did these banks buy?  But of course it is US Government guaranteed!!

How about on the 30 Year Treasury Bond?

Down 8.1% from 153 in July 2102 to 140.6 on Friday.  Corresponding yield rise from 2.40% to 3.30% on Friday. Net capital loss over 5% in 10 months.   On 100 billion of bonds that is US$5bn mark to market loss.  So with a US$17 trillion bond market at risk it is worth having a $US150bn crack at selling 100m oz of gold as was carried out over two days in April this year.  Yields on 10 year Treasuries fell from 2.1% to 1.6% in a successful but short term move over all of three weeks.  Now back up to 2.16%.  So it didn’t work.   Will have to buy the gold back.

Gold bugs were heartened when the response in the physical market was so strong.  USA, Europe, Hong Kong, China, Middle East and India could not believe their luck.  Demand for physical gold went up strongly.  As gold is money (a currency really) here was free money.  What were they thinking?

This cartoon explains it so well.  Thank you Merk Investments.      Junk currency for gold bars. What were they thinking?  It is easy to see who will win.

The World Gold Council showed that March Qtr 2013 was very active.  Demand from China was strong at 110t and well above previous quarters.  Coin and bar demand was 12% higher at 378t and central banks acquired a further 109t.  Total gold demand was 19% lower than Dec Qtr due to the outflow of ETF holdings by a large 177t.  Bloomberg reported that China’s imports through Hong Kong in March alone was a record 223t, more than double that of a month earlier.  And this was all before the April sell down that has set off the very strong demand around the world for gold at discounted prices.

We are also told that gold’s 2009 uptrend in US$ has been broken and the US$ is king again.  Well maybe.

The short term from 2009 was certainly broken in US$ but the seven year uptrend is still intact and markets are significantly oversold.

But gold in so many other currencies has held the uptrends and in the case of Japan actually made a new high in March 2013.  The 2005 uptrend has broken in Swiss Francs but new monthly closing highs in 2012 were seen in both the Swiss Franc and the Euro but not in US$ after the September 2011 high so gold still has strength in these currencies.

And two rather interesting histories of commitment of traders show record short positions in place (data from 2006) (courtesy of Tyler Durden)…

… and a long term very low short position held by commercial users and producers(lowest since the GFC in 2008/09). Thank you Dennis Gartman.  Could be particularly unlucky for some holding those short positions.

The market will do what it will do and we are just onlookers in these savage war games between buyers and sellers.

Here in the Australian market we can view the XGD and its fall from grace from the April 2011 highs.  From the day of the high at 8499 on 11 April 2011 we have had the following performances.  There are certainly some bargain basement stocks out there.

Max close Date of Price Change
Ticker: (A$) Price Max 03-Jun-13 (%)
XGD 8,436 11-Apr-11 3,018 -64.2%
RRL 5.87 03-Oct-12 4.11 -30.0%
BDR 1.12 03-Dec-12 0.71 -36.3%
NGF 0.27 09-Aug-12 0.17 -38.9%
OGC 3.65 01-Jan-11 1.96 -46.3%
NST 1.57 27-Nov-12 0.80 -49.2%
MOY 0.04 17-Jan-11 0.02 -53.7%
PGI 0.21 27-Apr-11 0.09 -55.2%
UML 0.20 01-Nov-11 0.08 -60.5%
EVN 2.14 24-Oct-12 0.84 -60.7%
PIR 1.97 18-Oct-12 0.77 -60.9%
MRP 0.45 02-Nov-12 0.18 -61.1%
TRY 5.05 29-Feb-12 1.90 -62.4%
RSG 2.16 07-Feb-12 0.79 -63.4%
NCM 42.66 21-Apr-11 14.99 -64.9%
ABU 0.08 14-Nov-11 0.03 -65.0%
EVR 2.64 15-Dec-11 0.90 -65.9%
GDO 0.56 05-Dec-11 0.18 -67.6%
SIH 0.25 04-Jan-11 0.08 -67.6%
DRM 1.57 03-Nov-11 0.50 -68.2%
AZH 0.97 01-Mar-12 0.30 -69.1%
MML 8.71 31-May-11 2.57 -70.6%
SBM 2.52 14-Nov-11 0.68 -73.1%
PRU 4.00 09-Sep-11 1.06 -73.5%
RED 2.35 10-Sep-11 0.62 -73.6%
TGZ 2.89 21-Jan-11 0.70 -75.8%
SLR 3.96 10-Oct-12 0.82 -79.3%
AQG 12.10 14-Nov-11 2.30 -81.0%
PEN 0.15 17-Feb-11 0.03 -82.0%
KRM 1.83 11-Apr-11 0.31 -83.3%
KCN 10.88 01-Jan-11 1.80 -83.5%
ALK 2.61 15-Apr-11 0.42 -83.9%
SAR 0.93 08-Dec-11 0.15 -84.1%
IAU 2.34 12-Apr-11 0.33 -85.9%
FML 0.10 07-Mar-11 0.01 -87.2%
RDR 0.71 06-Jan-11 0.07 -90.3%
RMS 1.70 10-Sep-11 0.16 -90.4%
GRY 2.11 11-Apr-11 0.19 -91.2%
TAM 0.98 19-Sep-11 0.08 -91.8%
Average: -69.1%
Median: -68.6%

These certainly are bargains on relative performance and Paradigm recommendations here would be:-

  • Evolution
  • Kingsgate
  • Medusa
  • Northern Star
  • Oceanagold
  • Regis Resources

There are of course dozens on non-XGD gold stocks that might provide some better leverage and we will be happy to share them with clients.

It is rare that one sector of the market should so significantly underperform the rest of the broad market (apart from XSR Small Resources) and I can only conclude that a 65% off sale is very attractive.

Even better than buying on eBay or Grays Online!!

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