Gold Miners: Enjoy the Dead-Cat Bounce

by James Brumley | July 19, 2013 11:28 am

The good news: Gold is on the rebound after getting trounced in the first half of this year. The SPDR Gold Shares (GLD[1]) exchange-traded fund fell 30% between the end of last year and the late-June low, but has since bounced back to the tune of 7%, with plenty more room to run.

The bad news: Gold miners haven’t snapped back with gold itself. The Market Vectors Gold Miners ETF (GDX[2]) was down 46% for the year at one point, and though in the meantime it has recovered more than gold itself has (in percentage terms), it’s still visibly lethargic compared to its commodity-based counterpart.

Aside from simply being maddening to fans and investors of gold mining stocks, the notable weakness from the miners is also forcing these investors to ask some tough decisions as to the future potential of these names. The overarching question, however, doesn’t mince any words:

“Is the rally we’ve seen from GDX this month just a dead-cat bounce?”

The answer isn’t a simple one, but it can begin with a simple premise — gold prices will need to recover far more than they already have to make gold mining a profitable venture for most miners again.

On the Bubble

Know what the total “all in” average cost of mining an ounce of gold is? The figures vary a little from one poll to the next, but the median and mean both seem to gravitate toward the $1,200 per ounce area[3].

If the number seems vaguely familiar, that’s because it’s roughly where gold has been trading of late. The recent bounce has pushed gold back to the $1,282 mark, though it had reached a low of $1,179 late last month. Point being, even on a really, really good day for gold prices, some of the miners still would be better off not bothering to dig the stuff up.

To be fair, some of the miners with better cost control can still operate profitably. Goldcorp (GG[4]), for instance, reports a sustainable total cost of $1,135 for every ounce of gold it digs up. Goldcorp is an exception to the norm, however. Some of them aren’t as profitable, while others aren’t profitable at all.

But none of them are wildly profitable the way they were when gold was trading near $2,000 per ounce a couple of years ago.

Thus, the beginning of the answer to the question of whether this is just a temporary (and limited) dead-cat bounce for gold mining stocks is “It depends.” It depends on where gold prices can go from here.

Fortunately, gold’s future is fairly predictable. Unfortunately, most fans and owners of these mining stocks aren’t going to like the prediction.

Where to From Here?

Whether it’s fair or not is irrelevant — gold miners are stunningly dependant on gold prices, and perhaps even more so now that gold is trading right around the typical all-in mining cost. As such, if you get a bead on gold, then you’ll have your bead on the miners.

So what’s in the cards for gold futures? In simplest terms, a little more short-term upside, followed by a lot more bigger-picture downside.

Demand for gold is deteriorating; of this there can be no doubt. In the first quarter of the year (Q2’s data isn’t out yet), the world consumed only 963 tonnes of the stuff. That’s the lowest level of usage seen since the first quarter of 2010 — right before gold-mania reached full speed — and underscores a bigger downtrend that actually started with the Q3 2011 peak consumption of 1,219 tonnes. With the exception of jewelry, all end users are broadly buying less and less of the stuff.

That deterioration in demand is evident on the chart … a chart that’s behaving fairly predictably.


After finding support at a key Fibonacci line (think of Fibonacci lines as the market’s organic support and resistance level) around $1,190 in late June, gold has bounced back a bit. It could bounce all the way back to the $1,333 area — where the 50-day moving average line and the 50% retracement level are converging — before hitting a ceiling. If the resistance at $1,333 is broken, the path is cleared all the way back up to the $1,477 area, where the 31.8% Fibonacci retracement line awaits, and where the 200-day moving average line will be soon enough.

Given the fact that usage of gold has already been fading for years, however, the purely technical bounce back to the $1,477 area is likely to be the best price we’ll see for a long, long time.

Additionally, with the Federal Reserve’s plans to taper its QE program at some point in the foreseeable future, inflation should be moderate, and the U.S. dollar should continue to increase in value. Considering that both are forces that work against gold prices in the long run, gold could find itself back in the $1,200 area later this year and/or early next year.

Bottom Line

Some gold miners might get some relief in the second half of the year, but it will only be temporary. The current rally from the Market Vectors Gold Miners ETF is just a small piece of what’s apt to be a drawn-out dead-cat bounce.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. GLD:
  2. GDX:
  3. gravitate toward the $1,200 per ounce area:
  4. GG:
  5. [Image]:

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