“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Tuesday, November 26, 2013

Continued Weakness Across the Mining Sector

While gold is experiencing a bit of a bounce over at the Comex, the mining shares continue their disappearing act as the selling is just relentless. What concerns me is the technical posture of this index. It is running out of time for the month of November to improve the deterioration showing up on the intermediate and long term charts.

The index is currently sitting near its session low of 203.04. As things stand at this moment, it is on track for the WORST WEEKLY CLOSE since November 2008. That is FIVE YEARS. As painful as it is for me to say this, another way of stating this is that the index has surrendered every single bit of its gains it made over the last 5 years. We are now talking about the potential for the index, IF IT BREACHES 200, to move to levels last seen at the very inception of the first QE program. Five years of wasted opportunity cost

I have said it before and will say it again, those mining companies that did not hedge any expected production when the gold chart broke down technically and the trend reversed from bullish to bearish, have done their shareholders a HUGE DISSERVICE. They willingly took on price risk leaving themselves open to downside risk in the price of gold. Businesses should not be in the business of speculation - that is for speculators such as myself. What businesses should be doing is managing price risk and locking in profits when they are available. That is what hedging is all about and why mining companies should act no differently than any other responsible producer.

Sadly, they are now being punished by the market for this folly. Perhaps we will see an end to this bearish trend in gold in the not too distant future and that will save their bacon, but that is no way to operate in an environment in which money flows are coming out of the commodity sector in general in favor of the broader equity markets ( to the exclusion of the miners ).

Here is the price chart as things stand for the moment. Note on the long term monthly chart that every one of the major Fibonacci retracement levels of the entire decade long bull market rally has been violated to the downside. The last one left is near 185. If the index falls through psychological support at the 200 level and does not immediately recover, odds unfortunately favor a move down to that final level of 185.

44 comments:

  1. Deflated balloon..next up for same treatment .....stocks
    After that, bank runs. Who wants to pay bank's for priveledge of holding your cash?

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  2. Dan, I've always suspected that hedge funds slam paper gold so as to short the gold shares. So it would not be making money on bullion but potential huge gains on the gold stocks. However, most of what I see on market depth seems more like algo trades "walking" the share price down as opposed to shorting.....don't know. Shorting would be to take advantage of price differential whereas the latter would be just to smash the share price....but for what purpose. That's what has me confused. What is the purpose for doing what they're doing because as retail loses interest in buying, who do you sell to and lately seems hedge funds selling to themselves or to other hedge funds but how does one know for sure?

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  3. With the year end fast approaching, Gold mutual funds and mining stocks are going to be under pressure due to tax loss selling. For this reason, the normal bullish seasonal period maybe delayed

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  4. The exogenous factors , such as gold price, have certainly hurt the miners, but the lack of hedging is just a symptom of their bad management.

    The miners' balance sheets are just terrible. They got complacent and took on debt and overextended. they believed all the hype they were hearing and reading on the goldbug websites.

    I cannot emphasize enough how much damage the goldbug websites have been to the gold mining sector. You all know who they are. This is why I never went back into mining shares after I sold my Vanguard Precious metals fund at 25.50 back in the summer of 2008.

    The mining companies are managed by a bunch of idiots. In fact, as I have written before, the largest miners are run by globalists and profit is secondary to managing gold prices. Look at ABX. Their stories are legion. Look at NEM. Same thing.

    Then you have the mining CEOs walking around and being told by the gold bugs that they are geniuses. (AEM).

    I just laugh and laugh at how people can be suckered again and again.

    Own gold bullion and hedge. The shares will be auctioned in bankruptcy. So easy to see as long as one has a sober and objective mind....

    This is why gold will touch 1,000. People are just too bullish STILL!!!

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  5. @AK, I agree with what you wrote previously, but my worry is that most gold bulls would not stand the heat of new lows under 1180 and that if we get there, a capitulation may occur.
    Those who would sell back their physical gold during the capitulation would of course become the victims of the market, and I don't want it to happen.
    I see it possible because imho the average gold bull is very vulnerable to such an event, and a perfect poker "fish".
    - they invested in gold for protection, but have little or no experience of the markets nor trading. They don't know what's a capitulation and will be vulnerable if it comes.
    - they invested for safe haven and purchasing power preservation and here is gold correcting already 40% from its tops. That was no part of the expectations.
    - they saw a gold market rising every year for 10 years. Many of them joined during the last years and bought high, probably above current prices. They were told and told again that gold prices would rise as long as QE would endure....NOOOT! QE is worsening and gold prices are plumetting. again, unexpected.
    - they bought too much gold in terms of proportions of their total assets, thinking the end of the world was for tomorrow.... Not. I'm thinking about this guy in the silver community, don't tread on me, who sold his house and all he had to buy silver at 35+ $. How many followed his example for gold?

    So, all this unexperience and gold prices not reacting as they expected will create enough doubt and disgust that they sell if this bear trend continues.

    I prefer to tell them : if you bought too much, sell a little right now, even up to 40% but then stick to the rest of it forever because else you are going to be the fish in the game. Better sell 40% now and risk to sell at the bottom than sell 80% or 100% in disgust when prices reach 1000 $.

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    1. You are right. There is a lot of denial, and there are still A LOT of people holding for the reasons you mention. They will throw in the towel. When they do, I will begin to unhedge. But I do not see that happening until we hit a ripe, round number - 1,000.

      HUI will be unrecognizable, as many miners will be gone out of business as publicly traded concerns.

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    2. Well said Hubert, I also think there will be more "weak hand" shaking in the coming months. It will be a shame as I believe when the paper gold market finally burns physical gold will require a high price to move. Strong hands (holding phys gold) will be rewarded. This includes most central banks. Too many bought gold without understanding why.

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    3. Gold bugs are not traders. It will have to go lower then 1000 for the majority of bugs to sell. I'd say $750 and even then I doubt it. Most gold bugs are people that have very strong convictions.

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    4. Hubert, I think you are right. We have not yet seen a full capitulation, but I wonder if we will ever get there because the physical demand is so strong. Remember, China owns well in excess of a trillion dollars in treasury bills and they are willing to divest themselves of those toxic bonds for any hard assets. China was a buyer of gold at $1,800, they were buying gold at $1,600 and they are certainly buying now. China does not care about the price of Gold today or tomorrow, all they care about is to accumulate as much as possible and they have plenty of dollars to do so at any price. If the price drops to below $1,000, I think they will back up the container ship to buy every last ounce of physical gold they can leaving the rest of to scramble for scraps. I think giving up your physical at these prices could be a big mistake for these reasons. I guess we will soon find out.

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    5. AK, giving up one's physical now IS a big mistake.
      My suggestion is to hedge.
      Whether like Eph by shorting when you feel unsure, via CFDs for small accounts.
      Or buying a few puts enough out of the money if you are lucky enough to manage options. That way you don't have to invest a lot of cash to protect your main position in physical.
      Anyhow we are getting close to the bloody 1180 now.
      So if one seeks protection, it's rather now than after it breaks (IF it breaks, once again, no forecast on my behalf about that)

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    6. Hubert, I think the world is overlooking the obvious and that is that China is aggressively positioning themselves to unseat the dollar as the global reserve currency. They have publicly stated that it's time for the world to de-Americanize. Part of their strategy to accomplish that is to accumulate as much physical Gold as possible. So while all the genius traders of the world and the gold bulls and bears argue back and forth on which way the next major move will go, China is all too happy to quietly accumulate all the physical Gold they can at any price and the lower the price the better. China has been buying Gold at any price and I don't think they really care all that much how they pay for the Gold given their massive reserves that they are trying to divest themselves of to buy anything of value. By the time most of us have figured out what they are really up to, all the physical Gold will have migrated from West to East in one of the biggest transfers of real wealth the world has ever seen. My point is that trying to time the bottom of this paper gold price decline may be the biggest investment mistake you will ever make if it turns out that when we finally reach the bottom, the physical Gold will all be gone. ABN Amro's and Rabobank's default on physical Gold earlier this year is a clear sign that bullion bank are running out of Gold. I don't know how low the price will go, but the lower the price goes the more aggressive the buying becomes. I think that China has been accumulating as much Gold as they can WITHOUT impacting the paper price, but I imagine if we go much lower from here they won't care anymore, they will simply buy up whatever is left.

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    7. I think you are right AK. At some point physical gold will require much higher prices to move. There will be a point when real gold hides at these ridiculous paper prices. Look at the physical drain from GLD this year. It must be close to 500 tons. These insane western paper markets consider that bearish for "gold" when it means the opposite. Gold is flowing east, good luck prying it out of Chinese hands for 1200 an ounce! Hold on to your real gold and dump the paper.

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  6. Hubert

    Wise words.
    I was just going back through some archived comments by numerous analysts.
    Armstrong only started to predict $1000 gold in the start of this year, up until that point he had predicted a possible low of 1350 with the uptrend restarting in 2013...wrong.
    Looking at the end of 2011 going into 2012 the commentators were going on how oversold the miners were and they were good bargains out there. This is when the HUI was around the mid 400's !!
    I have not lost once on shorting gold in the last year and I am far from being a skilled trader, what does this say about the market?

    Hubert, how do you recognize when capitulation arrives?
    We have to be either in it or very close at this point.

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    1. Hi Dean, speaking under Dan's control who for sure saw many more capitulations than me in real time, the simplistic answer is a capitulation is a sudden acceleration down of trend already going down from a long time. Instead of reversing slowly towards a balanced price, the slope of the trend starts to get worse and worse and volatility accelerates wildly on the shorter time units. All near supports are blown as inexistant. Volumes are usually huge, but during the short time of the capitulation. There are no bulls to be found anywhere, at any price, only sellers. Prices collapse faster and lower than the majority of players would expect.
      I can't tell you when a capitulation arrives. Usually when it starts, you are already in the middle of it and it's too late to sell.
      Right now we broke the status quo on the daily time unit : the bollinger bands which were in a quiet range are now in Phase 3 downwards. This move is about to contaminate the weekly time unit, but not yet. Bollinger inf, though, is not looking nice.
      The trend is drifting lower but supports exist, like the median of the weekly time unit downards pitchfork. As long as it is the case, to me there is no reason to talk about capitulation.
      I mentioned the possibility, but have no idea if there will be one or not. For sure for now, it is absolutely not the case yet.

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  7. Eph, what I'm wondering is : will there be enough time to see such a decline (and miners bankrupting and bought back by the globalist for a penny)?
    You write that the more prices drop, the more CBs will be likely to sell their gold (bad timers!).
    Venezuela is an illustration sure enough, and I read somewhere that Germany sold some in september.
    On the other hand, AK mentioned the firepower of China, and maybe we could add Russia to that one.
    We are playing chess here, and if it's a geostrategic game to check the West and their banks, I'm not sure Russia and Pboc wouldn't go all-in and absorb most of the bleeding by agressively buying even more physical gold rather than starting to sell. Unlike other countries, they don't have a knife on the throat to make them sell their gold because they are desperate for more dollar liquidity.
    So I'm once more quite unsure what would happen.
    I'm sure SGPMX will put the balance on the bull side since Sinclair became chairman of advisory board :) I'm kidding, but still making a bit of advertising for it. This guy at least is pushing hard to make what he talks about become a reality : emancipation of physical gold from paper prices. That deserves my encouragements at minimum. I hope that platform will be a success, as well as any other medium allowing to own real physical gold outside of the reach of some greedy bankers.

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    1. Regarding Jim Sinclair did anyone see this article by Bill Holter over at Miles Franklin?

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    2. The central banks (actually, the govts) are terrible timers, and i use them as contrarians. Yep, Venezuela comes to mind.

      What I do is play a little game theory. I picture a certain price and direction movement. Then I imagine what all the major participants will do at that price. For instance, right now, i see most major owners of physical gold holding their breath, hoping that prices do not fall much further. This will allow them to put off making disposition decisions.

      Then I picture gold taking out the June low. Miners will begin to seriously start to hedge out of desperation. As of right now they are not (according to COT), which is VERY bearish. I guess they think prices will rise. But they are not good timers either.

      Govts will also begin to reevaluate their gold reserves as they see stocks and even govt debt as better values (if equities stay here or rise). I believe many will begin to unload to pay debts. Also the bureaucrats will not want to take the heat of holding gold as some will question it as an opportunity cost.

      I can go on and on. We are not there yet, but we will eventually. If the govts begin to sell there will not be enough "Chinas" to absorb the supply - enough to make prices have a v-shaped recovery. prices could float for a couple years until a direction is established.

      As for armstrong, I think he is even a little too bullish long term. Nasdaq 5000 popped and prices did not rise up again for 10 years. Markets have a way of staying down longer than most imagine. At the nadir I think the dumb miners will be our worst enemy as they finally hedge production.

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    3. It will keep going down until it stops. No amount of belief will change the market "it is what it is". It can and will go longer and farther than anyone expects.

      The trend is your friend, ride it until it changes. Then and only then change horses.

      Dan will tell us when it has changed.

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    4. I think central banks could care less about timing. Central banks are expected to accumulate around 350T of gold in 2013 (down from 2012 by about 180T). Germany has sold 3.4 metric tons which is expected as the Bundesbank typically sell 6-7 tons per year to the finance ministry to mint commemorative coins. IMHO central banks have not been accumulating gold because of price action. It is a wealth reserve, not an investment.

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  8. Everyone writes as though $1000 gold is guaranteed. Nothing is a guaranteed. The negative sentiment on gold is breathtaking. Even the long term bulls seem to hate it.

    Why would you sell a low cost miner that is still making money (and paying dividends) now? There are too many black swans lurking and selling now would likely lock me out of any sudden jump due to an exogenous event.

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    1. weeble, take me out of the list. I don't know at all if gold will go to 1000 or not. I just say be prepared to the eventuality so that you don't sell it all at the lowest price if it occurs.

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    2. Weeble, who is making money at this level? And by money I mean Free Cash Flow? Seriously. Just glancing perhaps ABX & NEM for Q3. NEM is the Capitulation stock du jour, headed for a monthly close last seen in OCT 2002--that's a lost decade!

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    3. expect they will manage to show cash flow by reducing capital investment.

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    4. Royalty companies are making lot of money and have growth. Companies like Royal Gold, Franco Nevada, and Silver Wheaton should withstand a very low precious metals price and still make money even if some of the riskier mines shut down. If gold went to $1000 for a long term there will be a lot of pain, but low cost producers with income or cash on hand like Yamana and Newgold should survive and rebound strongly when gold goes back up.

      I am not saying they can't go down from here, I am just saying it is not all doom like so many people are saying. There is limited downside when these quality companies have already been hit so hard. Any sudden event that drives gold higher and these kind of companies will go up so fast that it will be hard to get in quick enough to maximize gains. It is not easy for any long term investor but I would rather ride them down another 10 % or 20 % over the next few months than be out of the market and miss out on a 10 % gain tomorrow.

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    5. I like the idea of the royalty business model as it reduces the risk of mining. Don't really understand the options they have when a mine closes / does not develop or produce. Think it is generally to take metal from other mines under the same ownership.

      In the worst case, if an ownership closes all mines, what happens?

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  9. Weeble

    Sure seems like a guarantee, If GS and JPM say it's going to $1000, chances are close 100% it will.
    You are right though, markets often will go where you least expect. However, we now have a situation where drunken gamblers with unlimited backing from the Fed are playing the markets. These TBTF entities can do what they want, when they want, to whomever they want with no consequence...none.
    It matters not the difference between a good miner and a bad one. The entire sector is being mercilessly slammed, it's a short sellers paradise.

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    1. If you are talking about GS and JPM I would rather look at what they do than what they say....

      I don't want to be another muppet.

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  10. Folks:
    I understand and agree with Dan's argument for financial prudence in management of the gold miners. Commodity producers and those whose business is dependent on commodities need to hedge to reduce risk. That is the fundamental reason the markets exist.

    However, to understand the actions of the gold miners management we need to look to fairly recent history - like the 10 year bull market in gold. Their share holders were rightfully expecting huge earning gains during this time and did not get them. Partly this was due to spendthrift ways and dumb acquisitions but at the root of it is hedging. They locked in prices way too low for way too long.
    Shareholders are smart enough to figure this out and told them don't you ever do that again. Some lost their overpaid jobs and bonus as a result.

    Now that the market is going down (still) they are personally better off letting the company take the losses while collecting pay and bonus for at best mediocre performance.

    I wont go as far as some in characterizing their intelligence. They are actually very smart and are managing for their personal self interest. I will say that given their demonstrated incompetence in hedging we as shareholders are likely better off with the companies staying is cash accounting vs. hedging production. The only thing approaching good strategy I have seen lately is hedging price when metal is shipped that HL is doing. And this only came after an embarrassment. Price dropped after shipment and before payment hurting expected earnings and bonus calculations etc.

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    1. Mike Ehlert;

      Thanks for the comments.

      I would say what I just wrote to anonymous. Any entity in the production of a commodity of any sort, MUST have a risk management department and must know when and how to read price charts. No exceptions... there are too many variables in today's global economy to allow any company to be completely exposed and utterly unprotected to downside price developments. It is simply inexcusable in my opinion.

      Like I said to anonymous, there are plenty of traders out there such as myself who can read charts and understand trends. Maybe they should hire us to help them if they lack a competent risk management department which cannot manage their hedging program. there are all sorts of price protection strategies which can be employed if there are experienced and knowledgeable individuals there who can implement them.

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  11. By the way, less and less mention of what a bargain the mining stocks are by the usual suspects, so despair may be setting in. pounded pounded pounded down. I would guess the better positioned royalty companies/streamers would be the way to go, as they can negotiate better deals with desperate miners...but then again RGLD, SLW, etc. haven't touched their june lows...

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  12. Utterly horrific.

    Hands down the worst crash of any sector in history.

    Yet the "acclaimed experts" will jump up and down and claim and say "Any Minute Now, I Swear"!!!

    GDX/GLD closed at all time, world record lows a .18 today, full crash mode now.

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    1. Mark this is the stock market not the Hindenburg crash.

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    2. Exactly Prophet.

      Get a grip man.

      If you are a trader then trade but if you are an investor than wait.

      Gold may go to $500 or lower BUT it will return. Sure you may lose an opportunity to make more $US profit but I thought gold was for insurance not profit OR am I wrong.

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    3. Even the GLD and SLV might soon do a REVERSE SPLIT. Do you think they could go BK?

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  13. Asking miners to hedge is like asking a farmer to hedge his crops, the farmer grows things and to be a futures market player at the same is asking a lot.

    Most miners (or farmers) don't sit on cash, it is needed for expenditures. Most miners already hedge but a year forwarded is not not technically considered hedging.

    Example HL has cash flow with low cost silver ounce production and pays a dividend no matter what method they use to the figure the numbers i.e. byproducts sold against production costs (on the other hand, why the CEO deserves 2 mil a year is beyond me), yet it is caught in the downdraft, it is sector wide.

    Talking cycles, human thinking and reactions, everything cycles. Armstrong had been calling for US markets to reach new highs, gold to fill some gap around $1,000 and the US dollar to outperform the other fiats, back when he was sitting in jail, based on his previous cycle findings. Still considers gold in a correction and keeps pushing the gold bull run further out, now to around 2020. So a lot can happen in the years to come. Only around $600 spot would signal the end of the gold bull.

    Gold/miners/sector pausing here and will resume its downward leg. One day's worth of activity doesn't qualify as capitulation.

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  14. anonymous;

    farmers do not need to play the futures market in order to lock in profitable selling prices on expected production. They can do quite nicely using option spreads. Not having hedges in place exposes one to the full risk of the market and is not wise. the futures market came into existence for the express purpose of providing farmers with a mechanism with which to lock in higher selling prices.

    no one should have to "ASK" miners to hedge. They should do it automatically. It is not my fault that too many of them have people in their risk management departments (assuming they even have one) who cannot read a damned price chart and understand when a trend has turned from one of bullishness to one of bearishness.

    When the trend turns, any competent risk manager will spot that and take action accordingly to protect profitability. If a mining company is too stupid to have a risk manager then maybe they should hire guys like myself to be their advisors and teach them how to take care of their shareholders by pretending that their companies are speculators and not businesses which are responsible to their shareholders.

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    1. Don't think I have ever heard of company management discussing thier risk management departments. Closest I can come off the cuff is their desire to do more drilling to de-risk the coming capital investment.

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    2. For the most part I agree with you Trader Dan. Miners need a desk for price protection but in a down market you would have to rely on contrary paper to help you through. Not impossible but takes a level skill that doesn't include how to run a shovel.

      An example would be JS and his TRX. You don't think JS knows how to hedge, buy swaps, find funding, etc.? Commits half the profits to the country he mines in, has no gold production to speak of now or in the future and is relegated to being a typical mining corporation that has just enough contracts (with China in this case) to pay the salaries of the principles. Shareholders left out in the cold but mining is a rough life esp. without finding pay dirt.

      As with most bottoming action, will come the acquisitions and mergers when the weak can no longer survive and are consumed into the collectives. I haven't seen much of that yet. China was buying the tops not to long ago but no rush now with slow economies everywhere.

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    3. Hey Dan,

      Thanks for your thoughts. From what l remember, miners were heavily hedged prior to the 2010, but as the PMs started surging miners bought back their hedges for a premium. In a bull market i would prefer an unhedged miner, but in a bear market you need to hedge. I guess that they have started hedging, selling into the bearish trend, pulling prices down more. Also, once gold rebounds, l wonder if gold miners will bounce back slowly the next time around.

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    4. John Kitcher;

      Yes, John, that is basically what I am saying. When the trend is bullish, good risk hedge management will lift the hedge while employing other option strategies in its place. that way the mining outfit can maximize profits from a rising gold price. When it is evident that the trend is stalling, then downside price protection strategies should be employed. It does require a lot of hands on trading/timing but then again, that is what all hedges require.

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    5. anonymous;

      those are very good points about those mining companies that do not have any actual production to hedge. They really do not have too many options left to them in an environment in which gold prices are falling. There are some strategies that they could employ but those would be the similar to something I might use which would really not be hedges, but speculative positions. That could be dangerous for all but the most experienced of risk managers.

      I agree with you on the mergers/acquisitions... I expect that we will see a fair number of those if gold stays down at these levels for an extended period of time.

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  15. There are buyers out there...who are buying.
    It may not be the exact bottom but they may be buying the deal of the decade, who's to know.

    How many here bought the Dow in Dec 2008 or Jan 2009 ?
    If you did back up the truck in those months then none of this should scare you in the least.

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