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Gold Miners Versus Gold: Back at Pre-Bull 2001 Levels

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Are gold-mining stocks a buy? They keep defying Wall Street’s best predictions. Here’s what’s clearer: A key measure of the sector is right back where it was before the beginning of gold’s 12-year winning streak — the streak that, barring some global calamity, will end this year.

Here’s a chart of the NYSE Arca Gold BUGS Index versus the price of gold in New York. Note the 12-year low in October. The same low is brought near again by this week’s carnage in gold and mining stocks. (“BUGS” stands for “Basket of Unhedged Gold Stocks.“)


So where does it end? Painful as the slump has been for gold investors — the metal’s price is down about 25% this year — it could take even more gold-price carnage for miners to scale back production and squeeze out real cost savings. That’s the suggestion of Citigroup analysts last week.

Citi’s David B. Wilson, Johann Steyn, Jason S. Sappor, Craig Irwin and Ivan Szpakowski wrote that “practically” the entire gold-mining industry is burning cash as companies fail to trim production costs as rapidly as gold’s price decline — down 25% this year. But the “all-in” view of gold’s cost isn’t what drives mining management, the group observes. That’s “cash costs”:

Gold producers more likely to analyse cash costs rather than all-in costs when considering closures
— In our view, cash costs provide a better indicator of cost pressures within the gold industry than all-in costs, as these are more likely to be taken into account by miners who are contemplating halting production. Indeed, while the analysis of all-in costs shows that the industry is under severe cost pressure, based on the spot gold price and production on our cost curve, just 1% of the sector is facing negative margins on a cash cost versus spot price basis[.]

Market Vectors Gold Miners ETF (GDX), which got within 2 cents of its 5-year low on Thursday, is up 1.2% to $22.77 Friday morning. SPDR Gold Trust (GLD) is ahead by 0.3% yo $120.28, bouncing off a four-month low. Leveraged ETFs Direxion Daily Gold Miners Bear 3X Shares (DUST) and Direxion Daily Gold Miners Bull 3X Shares (NUGT) are moving a little more than 3% apiece. iShares Silver Trust (SLV) is down a penny at $19.23. ''





On the week, gold was down -47.20 [-3.66%], silver down -0.95 [-4.66%], GDX -7.79% and GDXJ -9.67%. The weekly picture is one of almost unrelieved bearishness, silver down more than gold and GDXJ down more than GDX, with GDX dropping faster than gold. All the ratios look bearish. Both GDX and GDXJ are very close to breaking down - any move down below the June lows will likely lead to some more serious selling.

In addition, tax loss season fast approaches. Mining shares have dropped 46% year-to-date. Any hardy mining share investor who hasn't sold yet is probably sitting on some very large losses.'




Could tax loss selling drive gold miners even further down?

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RATIO of GLD-to-GDX is back at/near Record Highs


GLD-to-GDX Ratio


The price series does not quite fit into the channel that I have drawn



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