The US$ Outperforms Gold, Silver and the HUI so far in 2013

The chart below paints a sorry picture for precious bugs with the US dollar just managing to stay in positive territory as losses mount for gold, silver and the mining sector. In broad terms the US Dollar is up 2%, Gold is down 22%, Silver is down 32% and the miners represented here by the HUI are down 45%. All stomach churning stuff for perma bulls as the mining sector now has to generate gains of around 100% in order to get back to where they were at the start of the year. This is not impossible but it will take a monumental effort to achieve such a recovery.

As investors we are all looking for that signal, indicator, green light or a reading from the tea leaves that tells us that the bottom is in and therefore we can go hammer and tong and acquire our favourite mining stocks with great confidence and gusto. Some of our peers have already called the bottom and given the go ahead to hit the acquisition trail. As a gold bug I would just love to join them, unfortunately I haven’t caught the tide this time as I’m still of the opinion that the bottom still lays ahead of us.

Gold usually goes up on bad news and unrest as it is considered to be a safe haven in turbulent times. Over the last year or so the world has become a more dangerous place with mounting protests, civil war and the emergence of a new cold war between the United States and Russia. Did this deterioration in international relationships boost precious metals prices? No, they have fallen all year.

We start next month with Labor Day, 2^nd September 2013, which usually signals the start of better times for gold on a seasonality basis so we may see some seasonality buying.

This event is followed by the NFP payrolls which are scheduled for 6^thSeptember 2013. Last month’s figures were disappointing and should we get another month of disappointing figures it would cast a shadow of doubt over the possibility of tapering the bond buying programme as the economy would be viewed as a tad too weak to have the crutches taken away.

Gold’s upward mobility has been partly driven by the central banks obsession with printing money as a solution to any problem that comes their way. If they were to continue printing in perpetuity then the case for gold and indeed silver as an investment would be intact. However, the possibility of tapering the bond buying programmes in the US could be the very first indication that the punch bowl is about to be removed. Should this change in strategy be announced in the September FOMC meeting, 16/17^th September, then we could see the dollar strengthen capping any rally in gold and silver prices. Such moves by our central planners hold the key to gold’s near term direction and as we don’t know for sure which course of action they will take, then we cannot call this bottom as being in.

In conclusion I do expect both gold and silver to head to higher ground but not just yet. For me this is not a time to hit the acquisition trail, it is a time for exercising that old virtue called patience.

As for the precious metals mining companies, they are now in the precarious position of having to fend off a twin pronged attack from both falling gold prices and rising production costs. Staff Layoffs, mothballing plants, hedging sales, will be the order of the day for many of these operators.

Now imagine that you are on the board of a mining company and having to deal with the above, would you then be interested in spending millions on a junior exploration/mining company? I doubt it, as the priority would be to shore up the balance sheet and not deplete the cash resources any more than necessary. So where does this leave the juniors? In dire straits, especially those who are low on cash and have no or an insignificant cash flow, they could be facing imminent bankruptcy.

As always do the work before you put your hard earned cash on the line, these are treacherous times for investors so trade using small amounts of your capital and be able to walk away financially fit enough to fight another day, if all turns to custard.

With gold, silver and Uranium stocks being out of favor one must decide if this is a problem or an opportunity. We have steadfastly refused to buy gold and silver mining stocks for the last two years and as evidenced by the HUI we feel that our decision to hold back has been vindicated. The damage done to the mining sector may not be over yet but this demise is starting to offer up some exciting opportunities in my view.