Is Now The Time To Buy Gold Miners?

Remember a few months ago when I told you to get the Hell out of US equities?  It was only three months ago I shouted from  an unknown blog that there was absolutely no reason to have any investments in US equities or how about just two weeks ago where I sounded the rising volatility alarm?

Well US stocks are down a few percent and the VIX is at levels not seen in over 2 years! And this is just a taste of what’s to come.

These past few years the world has enjoyed unprecedented tranquility across all financial markets. Bonds and stocks steadily climbed in the period of Pax Central Banker but now that seems to be over as the Fed is tapering and the invisible hand that holds up the market goes with it.

When a system is supported artificially for too long, the natural supports of the system weaken. Theey can weaken to the point that when the artificial support is removed the natural support won’t be able to handle the increased strain in its weakened state. This is of course the world we live in. And now that the artificial support is being removed people are starting to get nervous and we can see that in the dramatic rise in volatility across a variety of asset classes.

One of those being commodities, and to be more specific let’s take a look at oil. The price of which has fallen from over $115 a barrel to under $85 in a short few months. The initial decline was partly due to a stronger dollar, which was also reflected in the falling price of gold. However, we have seen both the strengthening dollar and the falling price of gold reverse. The EUR/USD got as low as 1.25 and is now back to above 1.27. USD/JPY was above 110 and is now back to 106. The dollar has retreated and as for gold, which hit 1180 has since risen back to 1240 an ounce. The dollar has weakened, yet the price of oil continues to decline, unlike the price of gold which is rising.

Interestingly, while this trend has been going on, gold miners have sold off like hot cakes, which to me doesn’t make sense when the thing they sell increases in value and the cost of producing it goes down. Many of which are selling at fraction of their price to book value.

I expect the price of gold to stay around the 1200 level as volatility remains high and the price of oil to remain low as global demand slows.

Now could this all be temporary? Could the price of oil stabilize back over 90?

I don’t think so. The Saudi’s seem pretty set on selling oil at lower prices to hurt its competition in Russia, Iran and here in the US. Shale oil producers have been hit the hardest as their break even point on shale oil is about $80 which is where WTI is floating around today. Which is interesting, because these companies have a shit ton of debt, and no cash flow. So one has to wonder how long these companies can hold out with oil prices so low.

A counter argument is that global growth is slowing and oil demand is going down with it. So even if the US loses some shale production, it won’t make up for the global loss in demand. Which is what I think will be the case at least in the short term. What happens after the largest financial crash in the history of the known universe remains to be seen.

And if you don’t believe that growth is slowing just look at US treasuries. The 30 year just hit 2.85%. With that in mind, I don’t have high hopes for growth any time soon and will look at which gold miners I can pick up on the cheap.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s