Dow down -42 points. Gold down $12 an ounce.

Nothing special.

But gold must be getting close to a bottom. No one has anything nice to say about it.

The pundits and prognosticators are more pessimistic than in any time in recorded history. Gold miners are getting wiped out. Gold speculators are so gloomy their wives are hiding the carving knives and locking up the shotguns. From Business Insider:

If you thought things have been ugly for gold, then you haven’t paid attention to the gold miners, which have just been decimated.

As the price of gold declines further, gold will fall below the cost of production for these companies, resulting in years of negative cash flow.

Gold has declined by 37% from its highs in 2011. Therefore, we believe the myth that gold is a low risk “store of value” has been exposed for what it is to the latest generation of investors. Now, we fear that as understandably dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production.

In our opinion, this risk is not discounted in gold equities valuations. In our opinion, an asset that declines by 37% in value doesn’t qualify as a “safe haven” or “store of value.” And it never should have. Gold is a commodity whose price can rise or fall.

In conclusion, while we’d like to believe the carnage in the group is over, we don’t. With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining.

Another Great Buying Opportunity?

Surely, we must be getting close to a Second Coming – another great opportunity in gold.

So, we will not hold back. Why should we? You pay nothing for this service. The Diary is free. It contains our thoughts – worth every penny that you pay for them.

We begin by reminding you that we don’t know any more than anyone else. Maybe even less!

Still, we’ve been watching the gold market for the last 30 years… and we’ve spent a long time cogitating on the weaknesses of the human mind and other organs. We’ve come to some conclusions, which we happily share with you.

First, gold has been the ultimate money for a long, long time. It plays an important role. When other forms of wealth are called into question, people turn to gold.

Since it is likely that other forms of wealth – particularly US bonds and US dollars – will be called into question at some time in the future it is unlikely that gold will become worthless.

Second, central bankers are human. And humans are prone to error and prey to temptation. The record of history is clear. When central bankers try to solve their problems by printing money, the habit is hard to break.

Ultimately, their pieces of paper lose value. And if they lose value, they must lose value against something. Typically, they lose value against everything, especially against gold.

Third, markets are never stable. Prices are never lasting. Instead, markets discover what things are worth as conditions change.

Typically, prices bounce around in an unpredictable, unintelligible way. But over the long term, prices tend to go up and down in large, long swings.

Investors become fearful… then they become brave. It takes years for these attitudes to establish themselves… then dissipate. Trends last many years, culminating in extreme situations which are lifetime opportunities for smart investors.

Fourth, at the extremes, investors tend to get overexcited. They see a bull market. They want to get in. Buying (or selling) by these “mom and pop” speculators sends prices off the charts… bringing about the final blow-off in the market. But these moms and pops are always late to the party.

When they come in, it is time for serious investors to exit.

Fifth, there are no moms or pops left in the gold market. Even serious, knowledgeable investors have gotten out. From what we read, it seems more like a bottom than a top. The public is not interested. And the professionals hate gold.

Sixth, if we were speculating – and we are not – we would bet that gold is a better buy than a sell. The price could go anywhere. But unlike the Fed’s paper, gold won’t go away. And, at $1,100 an ounce, gold is likely to be one of those few investments you don’t mind telling your children and grandchildren about.

If you buy, wait five years. Then let us know how it worked out.

Regards,

Bill Bonner

Bill


Market Insight

From the desk of Chris Hunter

Let’s get one thing straight…

Massive technical damage has been done to gold… and gold miners… lately.

That damage needs to be repaired before an uptrend in gold can continue. (Something I dealt with on Monday.)

But the narrative that drove the gold market higher is still intact. As my friend Rick Rule put it recently, “The only things that have changed are the perception and the price, both of which are lower, which is better.”

The most useful way to view gold is as a currency – what you might call a “monetary commodity.” And, given that gold is in tight supply while central banks around the world are attempting (and in some cases – most notably Japan – succeeding) to debase the value of fiat currencies, the fundamental reasons to hold gold haven’t changed.

In the past five years, there have been over 500 interest rate cuts around the world. And QE… or the threat of QE… is now standard practice among most big, important developed-world central banks.

There has been lots of talk of “tapering” recently by the Fed. But it is still adding $85 billion to the monetary base each month… and says it will stop only when the economy conforms to its (deliberately optimistic) targets.

None of this makes the correction any more or less painful to holders of the yellow metal. But if you aren’t able to cope with prices moving in both directions, you have no business investing in the markets. As Barton Biggs so aptly put it:

We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways.

Many sellers of gold are also forgetting their market history. Via Liechtenstein-based asset managers Incrementum Advisors we get this wonderful chart. It overlays the current correction in gold with the mid-cycle correction in the 1970s bull market in gold.


View Larger Chart

As you can see, gold also saw a nearly 50% correction in 1975 before going on to post new highs…

My advice: If you own gold, don’t panic. But don’t start buying just yet.

I want to see a new uptrend form before I’m tempted into the market.

Chris Hunter

Chris Hunter
Investment Director
Bonner & Partners Family Office