Why this Historic Fall in the Gold Price Equates to a Historic Opportunity

Shell shocked?

You’re not alone.

Gold has tanked by 13.4% in just two sessions.

The drop in gold yesterday alone was the biggest fall in more than three decades…

You expect some twists and turns in this game…but come on…what the hell?

The whole industry is reeling. From small investors to bigwig fund managers and everyone in between — the smashing you’re seeing in gold has everyone’s heads spinning.

This has the hallmarks of a full-blooded, class A, DEFCON 1, capitulation.

But far from being time to panic, this is time for cool heads to prevail. You may never see another opportunity again like it.

Let’s first back up, and put this move in context with a chart. This move even dwarves the shellacking we saw in September 2011.

Gold…Going Cheap — if You Can Get It

Source: StockCharts

It’s a breath-taking chart.

But don’t expect it to stay here long.

You see, a gold price at $1350 is totally unsustainable.

The reason being that gold is now trading very close to the total cost of production for the world’s biggest producers.

This Gold Price Cannot Last

Once you factor in the corporate costs, sustaining capital, royalties, exploration costs and the rest of it, the real costs are often double what they advertise.

The result is that the all-in costs for gold production at the world’s majors — not just the C1 costs they’d like you to believe — are closer to $1250 / ounce.

And for many of the smaller producers, costs are now IN EXCESS of the current cost of gold. In other words, they’re losing money on the gold they sell now.

A year 10 economics student will tell you that this situation can’t last for long. Gold miners will have to slow production to reduce losses, and in some cases will have to shut up shop altogether. Supply will slow, causing the gold price to rise again. Gold is likely to bounce just on the expectation of this happening.

This is much like the situation we saw in iron ore last year, when iron ore crashed below the marginal cost of production briefly, before whip-sawing back up again.

This fall in gold has been even more extreme than even Goldman Sachs dared imagine. Last week they told clients to short gold, aiming for $1450 by year’s end.

It took a few days to happen…but then gold kept going.

Talk of Cyprus selling gold to pay for the bailout sent ripples out. However their 13 tonnes was immaterial to the market: China eats 13 tonnes for breakfast.

The concern was that maybe this would set a precedent for European nations facing similar situations. Investors are thinking: what if Italy had to sell their gold?

It seems unlikely given the tiny difference it would make to their debt levels. At current prices it wouldn’t even make a 5% dent in Italy’s balance sheet. The same goes for the rest of Europe.

Panic set in all the same, and soon you had technical selling as gold went through support level after support level.

Then matters got worse. Last night those helpful blokes at CME, who got their job on the basis that they didn’t have enough personality to get a job at a ratings agency, decided to hike margins on trading gold futures…

This put the squeeze on speculators, and caused another big fall in the price. There is a danger we see the same in China today. I’ll be watching.

But like I say, a gold price down here is totally unsustainable. Expect a bounce soon.

A very dirty game, to shake gold out of weak hands, is being played by some desperate players.

Savvy buyers are taking the opportunity to load up. And load up on physical gold – not the paper version. In the same vein, we have seen some mysterious moves of physical gold out of Comex in recent weeks from the big players. The big banks have been withdrawing their physical at the fastest rate in history.

You wonder what they know. Lifting our head out of the trenches briefly, we see that the US congressional deadline to raise the US debt level is on Thursday…

An Opportunity Amongst the Carnage

Existing gold investors are in pain right now, but this situation simply can’t last for long. Here’s a snippet of a note I sent Diggers and Drillers readers last night:

First The RSI is now down to levels last seen in 1999. When that happened, gold jumped 30% within a few months in the wake of the Washington Agreement.

Second, the current structure now has all the hallmarks of the 2008 structure: an exuberant rally followed by a drawn out 25%+ correction, concluding with a pull-back towards the 200 week moving average. After this happened in 2008, gold then commenced a three-year, 170% rally.

So is this latest move a precursor to something similar happening again?

First, we need to ask ourselves if the factors that drove gold up between 2008 and 2011 are still in place today.

Do we not still have continuing expansions in collective central bank balance sheets, with Japan just the latest entrant to the global money printing party?

And are the world’s major economies not still mired in low to negative real interest rates?

Also, is demand not still strong from key players like China, India, Central banks, and private investors?

In short — everything is still in place to support higher prices.

You may assume this painful price action would scare some off, but the reality is that it is a buying frenzy out there.

At shop level, retail investors are buying very rapidly. The guys at GoldStackers told me on the phone this morning they are insanely busy, and have only seen one seller in a week. I’ve heard many reports of the international mints seeing their busiest trade in years. And on the Shanghai exchange, phenomenal amounts are moving, with 120 tonnes settling already so far this month.

Here’s the thing — those that know the market are using this move to load up.

There are also increasing reports that despite this body blow to the gold price, supply is still tight. Certain products are getting harder to source. And after rising to 0.24% at the end of March, The GOFO (Gold forward offered rate), is trending back down again and is now at 0.17%. This is a good sign that the physical market is drying up again. 

So if the physical demand is so robust, and the market is getting tight, then what caused this move?

It’s hard to believe that a 24 hour, near 10% move in any commodity could ever be natural. Who ever really knows what goes on behind the scenes of this incredibly opaque market! But this move in gold has the fingerprints of the big banks all over it. It seems like dirty tactics from an anxious player.

We also had Goldman telling clients to short gold, with a $1450 target. Job done in record time! Now it’s time to cover your position and buy.

Goldman’s gold trade was yet another aspect of today’s gold market that reminds me of 2008. Back in 2008 they called for gold to pull back to $745. Gold actually went through that, in fact dipping briefly under $700. Once this was done, gold didn’t look back for the next three years, by which time it had increased by a cool $1200/ounce.

I’ve been following the gold story for months, and managed to get a meeting with Eric Sprott last month to run my ideas past him. We agreed that the opportunity was good when gold was at $1600.

And far from being time to cut and run, with gold crashing to the $1300’s the opportunity we saw last month just got much, much better.

Dr Alex Cowie
Editor, Diggers & Drillers

Ed Note from Kris Sayce: The gold price and gold stocks took a hammering yesterday. But does that mean it’s a good time to start buying? In today’s Money Morning Premium  , I reveal Doc Cowie’s secret gold stock buying formula that reveals whether you should buy or stay away…click here to upgrade now.   

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4 Comments on "Why this Historic Fall in the Gold Price Equates to a Historic Opportunity"

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Luke
Guest

While I’m a precious metals long, your extreme bullishness makes me nervous. It’s supply and demand, in the end. The market is oversupplied, while that inflation failed to show up for 2 years now and the market lost patience. “Slowly, then suddenly.”

Ravikumar
Guest

Hi Alex,
I checked with Friends in India and Gold stores are full of people after this fall in price. Buying Frenzy going on in India.

regards
Ravi

TRB
Guest

Well, Doctor Alex, shell shocked!

Blood, toil, sweat and tears my friend.

My theory there is no correlation between money printing from the FED, and Japan debt deflation maybe right.

All about emotions and crowd group thinking, nothing to do with money printing. Since April 2011, there has been major changes in crowd group thinking.

Mick
Guest

I’m thankful I didn’t sell my house and pour into gold, that’s all I’m going to say. Yet housing was supposed to be the bubble, I bet that’s bit you in the behind.