Given the profoundly bearish sentiment that has gripped so many
participants in the resource sector, particularly gold investors, we decided
to poll the chief editors at Casey Research regarding the current sell-off.
We recognize the severity of the situation and want readers to know we're
taking it very seriously.
We also want readers to know that the "Casey consensus" is
not a single view imposed on all, but the result of a constant conversation
we have among ourselves, questioning our own premises, making sure we don't
ignore new data if and when it contradicts our expectations. This is why some
of the thoughts below will seem less positive than others; we see this sort
of open discourse as a good and healthy thing for out business.
Without further ado, then,
here are the thoughts of the principal members of the Casey Brain Trust
(click on the names to read bios).
David Galland, Managing Director (The Casey Report): Of course, gold and
silver being taken to the woodshed (or is it the gallows?) at a time when
some central banks around the world have committed themselves to the wanton
printing of currency units, while others have committed themselves to
aggressive purchases of gold, makes no sense at all. It "should" be
going up by $100 an ounce, not the opposite.
But when it comes to any
investment market, there are no absolutes. Clearly, there are powerful interests
aligned against gold right now. And I'm not referring to government
suppression schemes which may or may not lurk in the shadows. Instead, I
refer to institutional money managers who are loaded to the eyeballs with
cash and itching for a return. That gold is a relatively small market –
certainly against stocks and bonds – makes it fairly easy to push around.
That institutional traders invariably keep at least one eye on technical
indicators has, in my opinion, led to something of a self-fulfilling prophecy,
resulting in this latest move downward.
So is gold in the woodshed or
on the gallows, waiting for the final blow? While the market may currently be
ignoring the fundamentals, the fundamentals exist nonetheless; and no amount
of hoping they be otherwise is going to change the basic setup. And that
setup is simply government debt that can't be paid, with more being piled up
every day in the tens of billions, an active currency war, and the wholesale
debasement of the major currencies. The precious metals should be owned
primarily as an insurance policy, and like an insurance policy pretty much
tucked into a drawer and forgotten about. As Doug Casey likes to point out,
there are also times that the precious metals (and related investments) are
also good speculations. Given the speed and severity of the latest pullback,
I think we could see a reverse of sentiment sooner than would otherwise be
the case. So maybe that's a good speculation. Personally, I'm going to hold
my fire until and unless gold gets oversold below $1,500 – at which point I
suspect the temptation to buy more will become hard to resist.
Marin Katusa, Chief Energy Investment Strategist (Casey Energy Report):
It's no secret that I've been bearish on most things in the resource sector
for the last 18+ months. At the Casey Conference in September 2011, I stated
that I believed a deflation in resource stocks would occur, meaning lower
prices. It is during times like these that the greatest opportunity exists,
when there is blood on the streets. And I can confirm that there is blood in
the streets in Vancouver, the epicenter of junior resource stocks in the
world. Stock brokers, money managers, IR firms, geologists – are all hurting.
This is good for us, because we look to buy things cheap. Sector pain is
good, because we are on the right track.
I think this will continue for
another year or two, but because there is so little to be optimistic about,
the stories that do show great potential will have the masses rushing into
them. Look at Africa Oil, for example. That was a story we were first to
recommend – but for years subscribers had to suffer from the boredom of a
stock that passed all of the Casey 8 Ps and had to wait until the company
drilled its 10BB block. Africa Oil showed a lot of promise, and the big funds
flooded to it because it was one of the few stories that had liquidity and
warranted the speculation. Our mantra in the energy side has been risk
mitigation and to book profits whenever possible. It was one of the few
stories the big money could speculate in – and that is a trend for investors
to watch, because if a junior does hit something tangible, the money is there
to push the share price a lot higher.
An investor needs to ask,
"What is my time frame?" I will give a personal example. Copper
Mountain, which today produces copper, gold, and silver, is Canada's
third-largest operating copper mine. I was extremely bullish when I became
one of the largest investors in the company in 2006 and invested even more
money in 2007 – I had a seven-year time horizon for the project. Copper
Mountain went public in 2007, the stock doubled to over C$2.50 a share, then
in a blink of the eye, November 2008 came along... and I had a penny stock on
my hands. I ended up buying a lot more stock at those prices in the open
market, because the company more than exceeded the Casey 8 Ps, and I had
nothing but the utmost respect for the management team and believed that Jim
O'Rourke and his team would deliver. Which they did: within 36 months, the
stock went to C$8/share, a 2,500+% gain from where I bought stock in the open
market in late 2008. It was one of the stories that survived the "valley
of darkness." However, if I didn't have a longer-term time horizon and
sold at the low of 2008, Copper Mountain would have been one of my largest
losses, rather than what it is – a major success.
After an investor understands his
time frame, he must stick with the due diligence and make sure the company
can survive the "valley of darkness." Things do change along the
way, and the company and its project may not have what it takes, and if so
you have to sell and cut your losses. But if the story is getting better and
the company is cheaper due to crappy markets, why would you sell?
So, I don't expect the overall
good times for the resource industry to come soon, but I view that as a major
positive. I view it as a positive because if you are able to find companies
that pass the Casey 8 Ps, you will be buying stocks for dimes on the dollar.
Fortune favors the bold.
Olivier Garret, CEO: The current technical
indicators for gold, silver, and mining stocks are quite bearish, telling us
there will most likely be continued pressure on the sector for a while longer
and that we are likely to test lower levels. It's possible that we'll see
market capitulation before this is over. While investors will find this
period painful as they look at their brokerage statements, they should not
lose sight of the fundamental reasons why they are invested in the sector.
Have these changed? Absolutely not. In fact, there is a lot of evidence to
That said, times of steep
market declines like these should be times to reassess one's portfolio. While
strong companies with great people, property, and the cash to pursue their
strategies for the next one or two years without going back to the markets
will survive and even likely to do very well (even if their stock prices are
disappointing right now), the weaker players are likely to be wiped out
entirely. So review your portfolio and no matter what the loss might be, liquidate
any positions except the strongest of companies. You will be thankful you did
so before it was too late.
Experienced investors in the
resource sector know that it is times like these when real money gets made.
For example, in the first quarter of 2009, our markets were absolutely
decimated – but the investors who stuck to best-of-breed companies and had
the courage to carefully add to their positions did extremely well in the two
years that followed. With the caveat that we may not have seen the bottom
yet, disciplined investors will again make a lot of money when the markets
turn around. Hopefully Casey subscribers have followed our advice to hold
lots of cash and take free rides on existing positions. It is too early to be
aggressive, but the current liquidation will present us with another
Bud Conrad, Chief Economist (The Casey Report): My main reason for
believing that gold is a long-term, solid investment is that government debt
is continuing to grow, so the Fed is "printing" up new currency and
that will debase the dollar. Gold is the best investment in the face of the
inflationary pressures of deficits and complicit central-bank printing.
The chart below shows the size
of US federal government debt and the price of gold. The point is that the
deficit is continuing because the government finds it easier to let the Fed
buy up debt than to raise taxes or cut spending. The very public failure of
Democrats and Republicans to even discuss solutions, combined with the $75
trillion of unfunded liabilities for baby boomer retirees, guarantees rising
(Click on image to enlarge)
The above two lines can be
presented as one line by dividing the price of gold by the federal debt to
show how much higher gold rose in the inflationary 1980s. Presented this way,
as the next chart shows, gold has a long way to go to meet the level of that
prior bubble's peak.
(Click on image to enlarge)
The safe haven is gold.
Jeff Clark, Senior Precious Metals Analyst (BIG GOLD): To a large extent,
the hedge fund managers and institutional investors don't see a second crisis
coming and therefore conclude gold is no longer necessary. They see the signs
that point to an improving global economy – and then notice that inflation is
not the big bad scare they assumed it would be by now. So they sold.
Technical levels were hit in the eyes of some, triggering further selling.
Throw in some panicked retail investors and forced redemptions, and the rout
All of this ignores the macro
picture – bloated balance sheets around the world and economies being flooded
with paper money. Yes, that's been the case for a while, but none of it has
been unwound – a process that will be difficult to time, messy to carry out,
and punishing to our standard of living. The reality is that inflation
is inevitable, regardless of what those who were pimply teenagers the
last time gold was in a bull market might think.
The way to view this is
short-term sentiment versus long-term reality. Don't let the weak hands pull
you under. For gold stocks, the blood-in-the-streets process is under way. I'm
personally turning over couch cushions to get ready. It may or may not
reverse soon, but sooner or later fundamentals trump shortsighted theories
and lines crossing on a chart. We'll have a lot more to say – as well as what
to do – in the upcoming issue of BIG
Kevin Brekke, Managing Editor, World Money Analyst:
The duration and altitude of the current bull run in gold has been
impressive. Over a decade of annual gains is enough to swell the fortunes and
add a bit of swagger to one's gait. A raging market produces more geniuses
than any university. But it will also lull investors who lack conviction in
the underlying fundamentals into complacency.
The vicious '08 gold sell-off
was easily excused away: global financial crisis, banking system on verge of
collapse, selling gold to meet margin calls… the memory is painful and vivid.
But the relatively quick return to former highs in '09 was just the balm
needed to heal old wounds and not leave a scar.
The subsequent horns-lowered
charge from 2009 to 2011 was a gold crowd-pleaser, persuading many that they
were ready for grad school. The swagger was back.
The last six months have dealt
a harsh blow to gold and silver and sucker-punched the miners. Compounding
investor anxiety is that the recent sell-off is happening within the broader
context of 18 months of the metals and miners grinding lower since gold hit
its all-time nominal high.
Yet, whether you are watching
the Fed's balance sheet or candlestick chart patterns, the fundamental
evidence has not changed. The spending, borrowing, and leveraging behavior of
today is the same kind as seen throughout the millennia, but to a far greater
degree. We should not expect a different outcome.
Now is not the time to run a
"conviction deficit." If luck is the confluence of opportunity and
preparedness, then I see some lucky days ahead. But be prepared for the
payoff to happen on someone else's schedule. "Imminent" does not
lurk dead ahead.
Louis James, Chief Metals and Mining Investment Strategist
(Casey International Speculator): On days like last
Wednesday, when gold was falling hard and fast, I feel such strong, mixed
emotions. Gold stocks plummeted, and I couldn't wait to wrap up my work fast
enough to start buying.
I've learned from Doug how to
make volatility my friend. As I've been writing for years, when an asset goes
on sale due to market psychology or other factors having nothing to do with
the asset's actual value – especially when nothing changes in the
fundamentals – it's a buying opportunity. I'm excited by the opportunity. But
I'm also concerned, because I know many investors are panicking, realizing
losses they don't have to.
Putting my money where my mouth
is, I went down to my local coin shop Wednesday, buying among other things a
one-ounce Canadian Maple Leaf that caught my eye. Am I worried that gold
might drop further? No. I didn't buy this Maple Leaf because I expect the
price of gold to rise, but because it's gold.
No matter what happens in the
financial world or the world at large, my Maple Leaf will always be one ounce
of pure gold, a value I'll be able to carry and use anywhere in the world. As
Doug taught me, I buy gold for prudence, not speculation. And the weight of
my new coin in my pocket was a happy comfort all the way home.
But the gold stocks are
another matter. Even though +$1,500/oz. is a very good price for gold miners
with quality operations, market sentiment is so bearish that a retreat to
$1,500 could cause a panic among gold investors that would trash the share
prices of good companies along with the bad. We could be very close to what
none of us have seen in this cycle so far: true market capitulation. That is
to say, regardless of the fundamentals, investors could just give up on
precious-metals stocks. And without bids, prices plummet. We should be so
Our technical-analyst friends
tell us that the likely bottom to the current correction should come around
$1,545. Some technical analysts are even saying that this gold bull market
has topped – I mean absolutely topped, and it's going to be a long bumpy ride
downhill from here. I see no reason to believe the latter and no inescapable
logic for accepting the former, but it's clear that there's blood in the
water and the sharks are circling. Such expectations could even become
self-fulfilling prophecies. With many gold-stock investors already close to
panic, if gold breaks below one of these TA support levels, things could get
really ugly... or beautiful, depending on your perspective.
All of this is very clear to
me, as is what to do about it. The first thing to do is to cancel all my
stink bids. If gold stocks are going to crash, I'm going to wait until they
have clearly done so – when people are cursing me for being a fool or a knave
and true market capitulation is obvious. Then I'll step in to see how low I
can place my bids and get filled. The potential for profit may exceed 2008
levels and possibly even blow away 2001 levels – that's what a real panic can
do for a savvy buyer.
Of course, gold may not go
down to $1,545, and any of the factors Jeff, Doug, and I have discussed many
times could send it sharply northward again tomorrow – or today. If Doug is
right about the economy coming apart this year, it won't be too long before
journalists are trying to outguess each other about how high gold will go by
the end of the year, rather than the opposite we see today.
This is why am not selling
anything – not unless I think the company no longer has what it takes to
weather the storm. If unfolding events on the global economic stage drive
investors back to gold, they'll do so with gusto, and it'll be off to the
races. I do not
want to be short.
I wish I had the eloquence of
Shakespeare's King Henry V, so I could make a Crispin's
Day speech that would give everyone the courage and discipline to fight
through to victory. If you have this courage and are able to act if stocks in
great companies go on sale at stupid prices, you will make yourself a lot of money.
Terry Coxon, Senior Economist (The Casey Report): For the last year or
so, I have leaned toward the idea that if would be a while before gold moved
much higher, since most of the people who understood how the deficits and
money printing that have been propelling gold have now bought in. I don't
expect gold to move to new highs until something happens that the other 98%
of investors will see as a reason to buy gold – such as conspicuously higher
rates of price inflation. The recent drop may be from impatience or from worries
that the Fed is going to throttle back from reckless printing of new money to
a money-creating program that is merely incautious. But I don't believe that
the bull market in gold is over, because the dollars that the Fed has
produced since 2008 are not going to get unprinted and will eventually come
out of hiding and fuel double-digit rates of price inflation.
Junior gold stocks are another
matter. People don't buy them as a store of value and won't keep them if they
are going sideways. So either they go up – which is hard to do when gold is
steady to down – or they drop. I wouldn't expect a recovery until speculators
are willing to bet on the metal rising, which I don't expect to happen this
Doug Casey, Chairman (The Casey Report): Frankly, I don't
care about short-term fluctuations in the gold market – or any market.
They're random and unpredictable. It makes no sense to clutter your mind with
guesses about what might happen in the next hour, day, week, or even month.
If you try to trade on that basis, you'll be eaten alive by commissions,
bid-ask spreads, taxes, and the vagaries of your own psychology. I'm only
concerned with the long term.
As for gold, it's not a
bargain at $1,600, but in light of what governments all over the world are
doing – creating trillions of new currency units – it's going higher. I
continue to accumulate it mainly for safety, not gain. Right now I'm
especially bullish on gold-mining stocks, which offer extraordinary
Gold and Silver HEADLINES
Gold Jewelry from Thailand (Mineweb)
The Indian government has
officially banned gold jewelry imports from Thailand on the suspicion that
traders are using this route to bring bullion into the country.
"The government has
announced that unless it is satisfied that gold jewellery imports from
Thailand had received 20% value addition in that country, they would be
India introduced the rigorous
measures to curb gold imports by raising customs duty on standard gold bars
and jewelry several times in 2012, the last one to 6% in December.
Apparently, as predicted by market analysts, it caused a surge in smuggling
and finding other ways to bring gold inside the country to avoid the higher
taxes, including importing gold from Thailand.
"Statistics show that
during April-November 2012, imports of gold jewellery from Thailand stood at
$92 million, against just $13 million in 2011-12. About $72 million of the
$92 million was recorded in October-November, during the festival period
which includes Diwali."
Now the Indian authorities
intend to close this loophole. It will be interesting to see what unintended
consequences result from the Indian government's attempts to thwart the will
of its own people. It's hard to say what they will all be, but as we can see
from the above indication, a growing black market is clearly one of them.
a Tough Year for Mining Industry (Mining.com)
Ernst & Young's updated
annual report on mergers, acquisitions, and capital raising in the mining and
metals sector shows that 2012 had the lowest number of deals since 2008 and
the smallest by value since 2009. The amount of money raised by mining
companies dropped by more than 25% compared to 2011. Mid-tier and junior
companies were the most impacted.
Financial resources were hard
to obtain via most traditional means, including IPOs, private placements, and
bank lending. The bond sector showed an uptrend, as companies used those
markets to diversify their capital structures.
"The capital strike by
many mining and metals companies in the face of rising costs and softer
prices in 2012 will continue until commodity prices recover sufficiently to
encourage new investment," Lee Downham of Ernst & Young said.
Since junior miners are
impacted the most by lack of financing, the concern is that there will be
fewer discoveries of ore deposits, which will put additional pressure on gold
supply in the years to come.
on World Gold Production (Mining.com)
The infographic visualizes
world gold-production numbers grouped by top producing countries, largest
mining companies, and usage.
Is No Dummy – It's Not Hard to See What's Coming" (Goldenfront.ru)
Last week, our Senior Precious
Metals Analyst Jeff Clark was interviewed by a Russian website regarding gold
This Week in International
Speculator and BIG
GOLD – Key Updates for Subscribers
number of BIG GOLD
companies released quarterly statements this past week, along with other
news. Get the latest on the BIG GOLD portfolio