The rate of descent in the mining shares is remarkable. Rarely does one witness a collapse of this magnitude and severity without some sort of period of consolidation. It speaks to me like a final washout is underway, even of the most die-hard, long term bulls.
In a period of only 9 months, the index has lost 60% of its value. As stated before, the damage inflicted on the owners of these shares, both financially and psychologically, has just about guaranteed that the vast majority of those who bought them as a hedge against expected inflation will never again in their lifetime come back as buyers in this sector. If they do come back to gold, it will be the ETF, GLD, or some other entity but it will not be mining shares unless management makes it attractive through dividends or some other novel method to own them.
In looking for a place on the chart where the POTENTIAL for a stem in the bleeding can occur, I have noted two different sets of Fibonacci retracement levels. The first set takes the entire decade long bull market and the second takes the rally off the 2008 low, prior to the inception of QEI.
Note how close the various Fibonacci lines from both sets (red and blue lines) come closely together at key areas. Notice also how both sets have failed to offer any support.
We are now down to a region where we are running out of support levels. I have noted the next one which starts below the 200 level and extends to 186. If that cannot hold, we are back to where the index was at the bottom in 2008, near 159 - 160.
Several readers have asked me where I think this move lower in gold could finally exhaust itself. That is a good question.
All I have to go off of is the chart plus the knowledge that various costs of production for gold continue to surface from the investment houses. Some put the cost between $1200 - $1250. I have seen other estimates taking that down to $1150 or so.
The point is that gold is nearing levels that are going to make it extremely difficult for many mining operations to continue at any sort of profit. Already I am getting reports from S. African miners that are in trouble.
As I mentioned in a previous post, mine shut ins will only begin if gold moves to these aforementioned levels and stays there a while. If it just hits those levels and rebounds higher, the shut ins will not take place. I do believe however that we are not currently in an environment in which gold is going to violently rebound higher. Barring some unforeseen event, there is simply no reason to hold the metal especially in the face of rising interest rates and a widespread belief that inflation pressures remain subdued. Throw in the fact that the US Dollar is very strong, and that means gold is going to have a difficult time mounting any sustainable rally in price.
All this being said, the chart does provide us some interesting information when tied in with those cost of production estimates.
Notice the lines that I have marked, "SUPPORT" on the chart and note the price levels that they come in near.
The first one is just about at the $1150 level. That number is mentioned above as one of the costs of production. Then you have a major 50% Fibonacci retracement level coming in near $1090 and another level of support near $1050.
I see things as follows: Gold has round number psychological number support at the $1200 level. Thus far in this meltdown, those round numbers have not been very good at holding on the downside; rather they have served fairly well as selling points for rallies.
If $1200 fails, then you have support down at the cost of production near the $1150 level. Seeing that markets tend to always overshoot prices because of margin calls and other assorted technical factors, if $1150 failed to hold, you could see another $100 or so drop in price. That would take gold into the next support level noted below the 50% Fibonacci level which is $1050.
Let's just say that I do not believe gold prices would stay down below that level for any length of time. I remember what seems an eon ago when it was buying from the INDIAN CENTRAL BANK that took the price of gold through the $1000 level. It never saw that level again.
My thinking is that Central Bank buying will be quite intense should gold ever get to that level.
My view is that $1050 would represent a buying opportunity, should gold get down that low for long-term oriented investors. Remember, this is for investors, not traders.
Obviously any production cutbacks would impact the supply side of the supply/demand equation only. We still need to see how demand will shape up as price descends lower. Demand must exceed supply if price is to rise.
