Thursday, September 26, 2013
Fear – of a Higher Power
Just one month after gold and silver prices capitulated at the end of June, large producers caved en masse and forked up write-downs of approximately $25 billion. Producers were caught off guard with the sudden fear – either tighten their fiscal house or risk a coronary in the market. Consequently, no stone was left unturned as valuations on current and future projects were reduced, discretionary expenses trimmed and even dividends cut. For the big boys it was diet now – or die a day later.
For some perspective, this was in stark contrast to a year before where many otherwise savvy value investors were falsely enticed by the sharp correction in mining shares and perceived cheap valuations relative to spot prices. The general sentiment at the time was that valuations had overshot on the downside, but were likely just testing the crisis lows from 2008. With Big Ben and company still ramping QE, downside seemed limited – what could go wrong? Unfortunately, most didn’t realize how much further spot prices could fall despite the abundant monetary elixirs and what would happen if the relative valuation lows from 2008 were broken.
The calculus for us back then was pretty simple. Spot prices likely had much further to fall and if valuations broke the 2008 lows, cheap would get a whole lot cheaper – and fast.
“If you have followed me on Twitter over the past six months you know that one of
my standing refrains throughout the weeks has been that the precious metals miners are still one of the larger value traps of this market cycle. And similar to the financials in the tail end of the previous cycle – it has ensnared some rather large whales in its net. From the sophisticated palettes of Einhorn to Gundlach, the extraordinary valuations of the miners – relative to gold, have been too attractive to simply pass up for these marque money managers.
Generally speaking, I have maintained a bearish perspective on the miners – despite valuations, for the simple reason I believe(d) weakness in the precious metals complex was and is ongoing.“ – The Value Trap 1/27/2013
While the comparative crisis low in the financials was a great benchmark on the way down, the miners have diverged over the past month from the V shaped bottom – so often found with a panic low.
Even on a relative performance basis, the retest by the financials in 2011 fits the character of the precious metals sector today – fear – of a higher power.