Setting the Stage for the Collapse in Metals – Gold Stocks

LDNGCM-Q 11-10-2014

For a classic bottom in any market, you have to just reach the point where the majority believe that the market is dead and it will never recover again. This is the traditional development at a major historical low. Despite the ranting and screaming, ETF inventories in gold continue to drift lower with more than 110 tons of gold having been liquidated since late August. The diehard Goldbugs do not want to talk about the demise of gold but this liquidation trend in the retail area continues. While there has been a slight increase in physical offtake at these lower numbers, thus is minimal and will have no impact upon prices,

Meanwhile, there are literally hundreds of mining companies still facing financial conditions that threaten their existence. About one-third of junior miners need to raise additional funds within six months or face closure at these price levels. Then just under 60% of the minor companies would need to top up cash within the next year. Even then 35% of major miners with a market cap of more than $500m also anticipate a need to change their capital structure within the next year.

This will be a difficult time ahead for the miners. Nevertheless, the requirement to be in place for a bona fide rally necessitates the closure of mines. What happens then, as the cycle reverses, you will not find the mines reopening until you are in the topping process. People respond to price action. They do not understand the business cycle and never live with the cycle. Closing mines at the bottom is the normal pattern that reduces supply whereas at the highs, all sorts of mines open up with promises of production.

Technically, the gold stocks have broken the uptrend and penetrated key support. This warns that the low is by no means in place as of yet.