Back in late September/early October 2011 — just after I told everyone gold had topped out at $1,925 — I also told everyone I could to get the heck out of mining shares.
I sure hope you listened. If you think the losses in gold or silver have been bad, the losses in mining shares are catastrophic.
Just this month, the main indexes tracking metals miners has plunged more than 20%, roughly triple the loss in gold.
The NYSE Arca Gold Bugs index (HUI) has lost nearly 23% month to date while the Philadelphia Gold and Silver index (XAU) has plunged over 21%.
Giant Newmont Mining Corp. (NEM) is down about 20% this month, 74.8% since its high in November 2011.
Barrick Gold Corp. (ABX) is down a whopping 31% this month, 87.4% since its high in August 2011.
Agnico-Eagle Mines Ltd. (AEM) is down more than 17%, 74.4% since its high in December 2010.
It’s no surprise to me, or to those who listened to me. But what’s probably going to surprise you now is — mark my words — the devastation in the mining sector is not yet over.
First, gold is headed still lower. Silver too and other precious metals. Sure, there will soon be a bounce. But don’t let that fool you. Precious metals will not bottom till gold falls below $1,000 an ounce.
Second, hardly any miners, even the best of them, saw this precious metal bear market coming. Worse, many of them were, and still are, in denial.
As a result, there are very few miners who have taken the steps to protect themselves. Barrick Gold, perhaps the worst of them, got rid of gold hedging at just about the worst time it could have. The time to hedge is when prices are high and about to start falling. Barrick did the opposite; it closed its hedges in September 2009.
Instead, it should have dumped its hedges way back in 2000 and looked to implement hedging in 2011. But it got its timing woefully wrong.
As a result, the company has taken huge losses on its reserves and production. This is not atypical. There are dozens of miners who were similarly caught off guard or poorly advised.
Third, the cost of production is still too high. At an industry average of roughly $920 an ounce for “all-in-sustaining costs” — which includes all costs that are incurred in order to sustain gold production at a given established level.
The industry is clearly seeing a massive profit margin squeeze. Thing is, it will get far worse as gold falls further, to near the cost of production or just below it.
The good news is this: Once the mining sector finally does bottom, vast fortunes will be made by savvy investors who scoop up shares in the strong survivors. But you’ll have to be very selective.
The comments just keep flowing in from readers, and we had some really good ones. Here are a few highlights:
Reader David asks:
“Larry, I see the Gold and Silver markets falling handily at this moment. You state that the metals will soon have an uptick and then downward further with gold under 1K, and silver to follow. While I know you can’t put a date on the above, can you perhaps elaborate what sort of time frame we are looking at before you suggest buying physicals with both hands?”
My response: November of this year is shaping up to be an important time period for a major low.
Reader Fran writes:
“Hi Larry, I listened to your 3 day interview and recommended it to family and friends. My question is as a 72 yr. old handicapped female living on social security and fighting bankruptcy, what do seniors or anyone in my situation do in the up and coming future?”
My response: Save as much as you can. And keep that money safe in a treasury-bill backed money market. Stay completely out of bonds.
Reader David writes:
“You say the U.S. market will be the refuge for money escaping the EU and Japan. Why not China instead, as refuge since you say it is such a powerhouse? Also would still like your opinion on whether brokerage accounts (like Schwab) might be safer than banks.”
My response: China, and Asia in general, will be a recipient of the flight capital (ex Japan). So yes, long-term I expect China and Asia to do just fine. As to brokers, yes, many will be safer than banks. Just make sure you do not sign any agreements or clauses letting your broker hypothecate (borrow) against your funds for their own use.
Reader Evan writes:
“With all the uncertainty in the markets, I have invested in bonds, treasury money market and certificates of deposit. I would like to know whether I am at risk of government confiscation, and what I should be doing with this capital to ensure its safety?”
My response: Get out of bonds. They are not only at risk of falling substantially, they are at risk of indirect confiscation, meaning at some point, Washington could insist you hold them. Treasury bill money market and CDs are fine for now.
Reader Barbara writes:
“1) Is it wise to own a home free and clear or should one keep a substantial mortgage in effect so the government won’t steal it from them?
2) Why haven’t you mentioned the “one world currency” in a long time? If the Euro countries, flight capital and Japan run to the U.S. $ for safety after they implode, where should we run to when the U.S. follows suit? There won’t be a U.S. currency to run to.”
My response: Depending upon your age and your income prospects, actually, the smart thing to do is to borrow as much money as you can against your home, for the reason you cited, but also because mortgage rates will never again be this low in your lifetime, and as long as you are judicious with those funds, you can get returns elsewhere.
From Reader Karey:
“In connection to China, why have they and India been stockpiling gold? Are they doing this for fun or do they also realize that through QE’s all the paper that has been printed is soon to be a doomsday device? Why would the Swiss after they dumped the euro move their gold from London to home?”
My response: They are not doing it for fun and they are not doing it to back their currencies with gold. They are simply investing for the long haul and diversifying their reserves. As to the Swiss, they are moving further and further away from gold. Moving gold closer to home is merely A. to save on storage fees and/or B. to get ready to sell it off.
Stay tuned and best wishes,
U.S. jobless claims are at their lowest in 42 years, says the U.S. Labor Department. The 255,000 unemployment claims filed in July were down 26,000, the fewest since November of 1973.
Greece likely has a bailout and a recession on the way. The country’s most influential think tank, IOBE, reversed its April predictions of a 1.0 percent economic growth and said capital controls and the three-week banking holiday would result in a retrenchment of the economy 2.0-2.5 percent throughout the remainder of the year.
Defense Secretary Ashton B. Carter is visiting Iraq today, assisting American and Iraqi forces in planning to take back the Iraqi city of Ramadi from the Islamic State. The loss of the Anbar province capital two months ago was the worst defeat for Iraq’s army since ISIS began its invasion of northern Iraq last summer.
A suspected meth lab blew up at the National Institute of Standards & Technology, a federal research center near Washington, D.C. last week. Congress is investigating, with Rep. Lamar Smith (R-Texas) commenting, “I am troubled by the allegations that such dangerous and illicit activity went undetected at a federal research facility.”
What are your thoughts on the news? Does Congress have a Breaking Bad situation on their hands? Will Greece ever get it together? And do the unemployment claims tell the full economic story?