Tuesday, November 12, 2013

Gold Miners: A Fool And His Money (GDX; GDXJ; GLD)

There have been quite a few commenters and pundits making wordy cases for gold miners recently and if they don't knock it off I'm going to start naming and shaming.
Here's pretty much all you need to know about the situation from Izabella Kaminska at FT Alphaville and she does it in under 500 words:
The gold producer wild card
BNP Paribas thinks gold is getting closer to the precipice.

How quickly it’s likely to be pushed over will be determined by the rate at which producers accelerate their hedging activity.

From BNP’s commodity markets strategy group on Monday:
Investor demand in the form of physical ETF holdings remains lacklustre. And if commitment of trader data for gold futures show a rebound in net long positions held by money managers, it is hardly enough to write home about. With the USD strengthening of late and the prospect of further US economic recovery and higher yields lending more support to the greenback, we do not expect official sector purchases to shore up gold. On the physical side, import demand from countries such as India and Turkey is unlikely to be a material factor given that their currencies continue to be weak against the dollar. In the case of India, the currency hurdle is augmented by policy decisions to circumscribe gold imports. If we are proved correct, the wild card in gold’s price descent remains producer hedging. Producers, the share prices of which have not been faring well of late (Chart 1), might initiate and/or accelerate hedging were we to approach the symbolic $1000/oz level, adding supply to the market and further downward pressure to prices.
It’s worth noting that this is exactly the sort of thing that gold bulls don’t seem to get: the more producers hedge into thin forward demand, the more likely the curve is to backwardate. Since the hedging is propelled by fear of insufficient demand tomorrow, it has the impact of effectively bringing future sales forward to today — seizing today’s high prices for tomorrow’s supplies.

In this scenario backwardation is simply not a bullish indicator. If anything, it is fundamentally bearish....MORE
Two quick points:
1) In the peanut gallery one of the commenters asks:
I'm sorry, where are you getting the idea that producer hedging is going up? 
I don't see anything in the BNP note that says hedging "is going up" gerund, to date only some of the pros have hedged, old man Hambro comes to mind.

Rather, the note is using "going" in the future perfect tense, that it will happen as producers quit with the "hope it will come back" strategy and have the belated realization that "Holy crap, if we don't lock in now we'll be selling below cash cost"..

2) Izabella makes the backwardation point that I tried to express back in August's "Gold in Record Backwardation":
...The shape of the curve, contango or backwardation doesn't do much to inform directional bets, there are a lot of inputs into what the price, current and future ends up being. There is however a meta-message from the structure: If a market is in backwardation it is telling holders of physical to sell now as the future price is lower. This doesn't tell you where the spot price is going to go, backward markets can go up or down but they do help with another of the three factors of commodities trading profitability, roll yield....
For more from Izzy and some comments on hedging see "UPDATED--Gold is Going Much Lower".
The big miner ETF, GDX looks to open down 13 cents at $24.19, the junior ETF, GDXJ isn't trading pre-market but closed yesterday at $35.85.

Despite gold being a hundred bucks above the $1179.40 low the ETF's are already closing in on new cycle lows:
Chart forMarket Vectors Gold Miners ETF (GDX)