"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


Thursday, May 3, 2012

Mining Shares Continue being Pummeled

No matter which way you measure it, the mining shares are systematically being destroyed as the HUI just made a new 52 week low in today's session.

What else can be said about these shares that has not already been said - their performance against the price of gold bullion has been atrocious while they have seriously underperformed the broader market since September of last year.

Management needs to get out in front of this and where possible, cash profits should be returned in a much larger percentage to the shareholders in the form of a stronger and higher dividend. They have to give the owners of these shares some incentive to continue to hold them and with zero to mere meager dividends, there simply is not enough to keep the longsuffering holders hanging in there.

In an interest rate environment as low as this one, a 2% dividend is a joke considering the fact that there has been a huge capital loss in so many of the shares. That sort of dividend does little to compensate the holders for these paper losses that so many are accruing. Only those who for the most part bought into the shares at the end of 2008 or into the first part of 2009 have some cushion to work with.

Note the HUI-Gold ratio chart using the closing monthly prices only. It is now at levels last seen at the end of 2001! We are talking more than a decade ago as far as valuation against an ounce of gold.

Here is one more look (as if to add insult to injury at this point) the HUI in a monthly chart all by itself.

Note that unless it can recover the 420 level very quickly and move back above 440 so as to indicate a bottom has been put in, there seems to be little chart support until one gets to the 400 - 390 level. That is both a horizontal support level as well as the 50% retracement of the entire rally from the bottom formed after the first round of QE was announced way back in 2008.

If the index does not hold at that point, the shares could then be technically vulnerable to a final washout all the way back to 350. At that point, one would expect to see the final end to this mauling. After all, the discounted value to gold bullion would make it irresistible to sovereign wealth funds not to mention a huge wave of buyouts and takeovers by majors of juniors and exploration companies.

One thing to note here - the S&P 500 is once again flirting dangerously with its 50 day moving average which is a mere 6 points below it current level as I write this. If tomorrow's employment numbers are the stinker that many expect them to be, it will probably initially fall through this level. if it then rebounds, it will do so on hopes or expectations that the Fed will not be able to avoid another round of QE. After all, they have managed to smash the commodity sector down and even gotten gasoline to move lower. They have plenty of room now to play if they want to.

The big question is, will Bernanke save his boss Obama or will he let the stock market implode by standing by if the economic data has traders selling equities during an election year? I doubt it because he is out of his job as Master of the Universe if Romney wins and believe me, he damn well knows it.

Draghi Derails Gold

Apparently ECB President Draghi believes things are going so well over in Euroland that traders are "correct" in their perceptions that no near term stimulus is needed. Down went gold, and silver, and copper, etc. as money flowed out of those markets and elsewhere into I have no idea what based on the fact that the equity markets are lower and are the bonds. Let's call it mattress money flows.

Meanwhile data coming out ahead of tomorrow's payroll numbers are indicating that the report will not be particularly strong here in the US. It will be interesting to see if we get a weak number how gold reacts to it. Normally we would expect to see it lower on the risk aversion trades but if it actually moves higher on a weak number, it will be additional fodder for the notion that the weaker the economic numbers are in the US, the better the chances are of the Fed engaging in a third round of QE (at least as far as a growing number of traders believe).

Anyway, for whatever reason, once again gold could not make it past the $1680 level as it was not even able to make it any higher than $1672 before the buyers stepped aside. Having fallen back below $1650 is short term negative however and now we will need to see whether or not it will fall as deeply as the $1620 level or lower where previously buyers have made their presence known.

The mining shares are lower today (Gee what a surprise - do these things ever go higher anymore) but remain above 420 in the HUI. Perhaps we will get a bounce from that level and confirm it as a bottom. We simply have to wait and see.