Night follows day, and then day follows night, just as bull markets follow bear markets. It is a cycle of the universe….a certainty. So we know we will get a bull market in the metals again. Its just a question of when, My primary focus is I want to ride the next bull from start to finish. That’s where the big money will be made, NOT in the scalping of little stuff we try to do on the way down. I have laid out my thesis that we have a phase III ahead of us and I stand by this work, however I never want to be a dogmatic ideologue who misses the move because he has to prove his theory. This is of course what all the Keynesians are doing after 6 years of ZIRP is now destroying our financial world trying to prove their dogmatic theories. Stockman calls it ritual incantation, by the Keynesian zealots,
Rambus’ charts support my work with his price objectives and here comes along these comments by the CEO of Eldorado mining (EGO) which further backs up this prolonged roadmap for the bear:
Has the mining industry become more efficient now, three years into a bear market? We’re not there yet. The gold price hasn’t been low enough yet for there to be a real cleanse. The landscape is still littered with the ‘walking dead’ among junior miners and management teams. For that reason I’m not convinced that we’ve seen the bottom or that we’re going to see a rapid turnaround in mining stocks.
The bull market was especially long. I’ve never experienced ten years of ‘summertime’ in the mining sector before. Usually the bull market trends are a lot shorter. During those years of ‘summer’ we saw a horrendous waste of capital. A lot of money was spent on poor projects and poor mines. It’s going to take a while for all that to wash out.
Essentially this lines up with what I have been describing for a long time. Also put this quote in context of the crash in the oil market we have seen and the stockman articles I have been posting about what has driven the fracking boom…..artificially low interest rates and junk bonds, supplied by the reckless FED combined with propped up energy prices. This has fueled wild malinvestment in this sector. I wonder how long it will take to purge all of this. Sounds to me this is the making of a long bear market….I digress, back now to the gold bear.
So here is the point of this piece. We have been witnessing now for 6 months a new dynamic and that of course is a reversal in the REAL price of gold. Gold has been increasing relative to the price of commodities. That’s right the input costs to the production of gold have been declining relative to the price of the end product of gold itself. That my friends is the main ingredient to a bull market in the mining companies. That is what drives the profitability of the mining companies themselves. Lets take a look at these charts of the real price of gold. I am using both the CRB and the Rogers Intl commodity index so they are not perfect, but serve as a proxy to mining cost What they lack is the input cost for labor and are not tailored specifically for the mining business, but its the best we have
Note the last chart where the Gold:CRB ratio bottom preceded the beginning of the bull market in gold stocks by 1-2 months back in 2000 and nailed the end of the bull market right on the month of the top in 2011. Pretty amazing. I don’t consider the crash of 2008 as a bear market it was a liquidity event. A huge correction in an ongoing bull market. So now we must ask ourselves are we there yet? Is the 6 months reversal in the real price of gold the turn that will fuel the next bull market or is it just a bump up in the downward trend that started in 2011?
Let’s look at a few more clues:
The HUI:GOLD ratio launched right at the bottom of the bull market, but peaked in late 2003. This to me reflects the recklessness of management teams in my view. Once the bull market was on they thought it would never end and the trees would grow to the sky. I remember this period well, it was the birth of the gold bug narrative. So company performance underperformed gold itself and it was reflected in this ratio. As companies became more reckless, bought and developed more marginal projects their profitability could not keep up with the increasing costs of their operations, hence the decline.
Next the Silver:GOLD ratio, this typically rises in a bull market. As you can see its an imperfect measure. It is of some value especially the spike top, however use it as additional information not a specific timing gauge. Note it trended down for 2 years before the bull market started.
Finally is GOLD:USD. This seems like a pretty good historical measure of the dynamic driving a bull market in gold. Let’s keep our eye on when this indicator turns.
So does any of this information point towards a bottom in the gold shares market? Maybe… its too early to tell of course, but I do believe it is at least saying the dynamics are being introduced that will power a bull market. There was so much malinvestment in this sector that I suspect it will take a while longer as the CEO of Eldorado has stated. But this is an encouraging sign. Lets keep an eye on it.