The precious metals massacre continues unabated…

Gold bulls are getting massacred.

The market euphoria that has gripped the main boards and taken hold of the “all is well, bravo the Fed!” crowd has a nasty sting for any pragmatist who knows that a debt crisis cannot be solved by yet more debt. That the latter group will almost certainly be proven right in the long run will do little to cheer them if they are wiped out in the meantime. This could well prove to be the bitter irony of what is happening now. What was it Keynes said about the market remaining irrational longer than he could stay solvent?

Anyway, back to today and gold mining stocks and associated ETFs have been crushed under heavy volume selling, and the price of the yellow metal looks almost certain to retest its 52 week lows (note I said “almost”). If this happens and the decline continues then serious technical support looks well over $100 away. Gulp!

Just imagine what a further $100 drop would do to this beleaguered sector!

I’ve got to admit I am delighted (is that the right word?!) that we’ve released the December issue of Spreadbet Magazine when we have. No sooner do I pen a piece outlining the fundamental reasons why gold could be the turnaround story of 2013, then the market delivers one hell of a succour punch. Every day we are awash in a sea of red, the investment community consensus is unanimous that ‘this is it’ for gold, jeez, even the bulletin boards are full of despondency and despair. In what is supposed to be a seasonally strong time of year for the precious metals spectrum, thus far, any hope of a sustained rally has been dashed violently on the rocks.

However, here at the good ship SBM, we are still clinging onto our bulish view. Admittedly this fraught grasp is probably similar to that of a shipwrecked mariner clinging desperately onto a bit of flotsam, as the storm rages around him, but so far we haven’t slipped under, into the murky depths of the unforgiving sea!

We still believe this game is not over yet and what is happening now presents a buying opportunity for the bold.

Every time I open gold-related charts, I have a little mantra that runs through my mind – “nothing has been solved, the debt is still there, nothing has been solved, the debt pile grows worse…” Repeat, again and again.

Who knows, perhaps this is the early onset of market-induced neurosis?!

Whatever the case, the point still stands. Nothing has been solved and it is clear nothing can be solved unless there is the mother of all bad debt purges. The problem for gold’s apostles like ourselves is that this has been true for the last 5 years, and yet so far our overly-leveraged, QE-addled economic system of imbalances and waste has survived… Central planners have kept the barbarians from the gates and the total collapse many gold bugs have been predicting has not yet materialised. — (As an aside I have to chuckle about the word “yet”. It has to be the most revered word in the gold bugs’ lexicon!)

So why is that we are still so positive when the ticker is telling us categorically, without shadow of a doubt, cross its heart and hope to die that I am wrong?

The answer is simple. As we wrote in the December issue of the magazine, we am more and more convinced that gold has fallen so far that it is no longer just a crisis trade.

The price has fallen so dramatically over the last two years and costs have risen so greatly that we are now nearing or are at the price of the marginal cost of production. See chart below.

If this is right, then it changes the landscape for gold, almost beyond recognition.

In my article, I drew from the latest instalment of Hebba Investments’ long running commentary about the true all-in production cost of gold. It can be found here and if you are not familiar with this work, I cannot urge you strongly enough that you take a look at it. Hebba’s methodology is thorough and concise. It’s easy to grasp and makes a great deal of common sense. Their latest analysis concluded that the average all-in cost per ounce of gold mined by the largest listed companies (represent over a quarter of global production) was $1,221.75 in Q3.

Given that the spot price of gold is trading at $1,220/oz as I write, I think the message is fairly clear. A further and sustained drop in the price of gold will inevitably lead to the mining industry scaling back production. This might take some time to filter through into causing a reaction in the price, but the outlook for gold will change fundamentally. Given how gold is so deeply ingrained in the popular psyche as the crisis trade of crisis trades and an apparently superfluous hedge against inflation, the chances are that most people will miss the change in the nature of this market.

Such opportunities don’t come around that often, but if we are right then this is exactly how you want to position yourself to take full advantage of.

But it’s going to take some balls…. Part 2 tomorrow!