If you thought things have been ugly for gold, then you haven't paid attention to the gold miners, which have just been decimated.
As the price of gold declines further, gold will fall below the cost of production for these companies, resulting in years of negative cash flow.
Gold has declined by 37% from its highs in 2011. Therefore, we believe the myth that gold is a low risk "store of value" has been exposed for what it is to the latest generation of investors. Now, we fear that as understandably dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production. In our opinion, this risk is not discounted in gold equities valuations. In our opinion, an asset that declines by 37% in value doesn't qualify as a "safe haven" or "store of value." And, it never should have. Gold is a commodity whose price can rise or fall.
In conclusion, while we'd like to believe the carnage in the group is over, we don't. With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining.
So, we will not hold back. Why should we? You pay nothing for this service. The Diary is free. It contains our thoughts, worth every penny that you pay for them.
We begin by reminding you that we don't know any more than anyone else. Maybe even less!
Still, we've been watching the gold market for the last 30 years...and we've spent a long time cogitating on the weaknesses of the human mind and other organs. We've come to some conclusions, which we happily share with you.
First, gold has been the ultimate money for a long, long time. It plays an important role. When other forms of wealth are called into question, people turn to gold. Since it is very likely that other forms of wealth - particularly US bonds and US dollars - will be called into question at some time in the future it is very unlikely that gold will become worthless.
Second, central bankers are only human. And humans are prone to error and prey to temptation. The record of history is clear. When central bankers try to solve their problems by printing money, the habit is hard to break. Ultimately, their pieces of paper lose value. And if they lose value, they must lose value against something. Typically, they lose value against everything, especially against gold.
Third, markets are never stable. Prices are never lasting. Instead, markets discover what things are worth as conditions change. Typically, prices bounce around in an unpredictable, unintelligible way. But, over the long term, prices tend to go up and down in large, long swings. Investors become fearful...then they become brave. It takes years for these attitudes to establish themselves...then dissipate. Trends last many years, culminating in extreme situations which are lifetime opportunities for smart investors.
Fourth, at the extremes, investors tend to get over-excited. They see a bull market. They want to get in. Buying (or selling) by these 'mom and pop' speculators sends prices off the charts...bringing about the final blow-off in the market. But these moms and pops are always late to the party. When they come in, it is time for serious investors to exit.
Fifth, there are not now any moms or pops in the gold market. Even serious, knowledgeable investors - including miners themselves - have gotten out. From what we read, it seems more like a bottom than a top. The public is not interested. And the professionals hate gold.
Sixth, if we were speculating - and we are not - we would bet that gold is a better buy than a sell. The price could go anywhere...but unlike the Fed's paper, gold won't go away. And at $1,100, gold is likely to be one of those few investments you don't mind telling your children and grandchildren about.
If you buy, wait 5 years...then, let us know how it worked out.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.