Reflections from Santorini – Are you going to be brave enough to buy the great gold and silver stock sale of the century?

7 mins. to read

The vista seems to soothe the nerves!

For bulls of precious metals stocks, recent weeks have been absolutely tortuous. I have to go back to the dark days of 2009 to recall an environment where sentiment has been so depressed on these stocks. The Mrs and I have in fact had to depart to Santorini for some late summer sunshine to recuperate from the drubbing and given the volcanic nature of this island it seems rather apt given how we feel the sector is presently poised…

A quick glance at a few charts below illustrates just how devastating the last 6 weeks have been for some of these companies. Many perfectly sound precious metals mining plays with good balance sheets have lost between 20-50% of their market capitalisations. That is a serious routing by any yardstick…






That the gold price has fallen by around 5%, and silver circa 10%, has certainly not helped matters for sure but the magnitude of the falls in many stocks has taken even me by surprise, and I have seen a lot in near 20 years in the markets! I last wrote about silver HERE just before it took off nearly $3 and everything within that piece still stands. Only difference now is that the value case is even more compelling.

Fact one – If the price of silver in particular remains at this level then pretty much the entire silver mining spectrum will be running at a loss. This is actually a good explanation as to why a relatively modest fall in the physical metals has had such a disproportionate effect on the price of the producers. In essence, the worst price level to fall through was $18-19 for silver and $1200-1250 for gold as this is where profitability for the industry falls off a cliff and it runs at a loss.

So, at this point of the game with the gold and silver mining sector trading back towards 80 year nadirs relative to the underlying metal prices and the price of silver relative to gold back towards its upper extremes (signalling undervaluation relative to its yellow brother), one has to ask oneself if the lights are going out on the industry..?

If you believe that gold has no place in the international monetary system, that silver ditto has no real future industrial application and if we close our eyes to “peak mining” (ie production of the metals is forecast to decline going forward) then it probably pays to add to the veritable packed house of shorts and bears in the future’s arena. If however you believe in fundamentals and that price must ultimately follow these fundamentals, that strong and seasoned hands’ buying of gold and silver is noteworthy and that mean reversion and contrarianism works (with patience), then one cannot be anything other than an arms, mouth and pants wide open buyer here.

Here’s an interesting real, unarguable set of facts displayed very acutely in the charts below in relation to silver: Open interest in the futures contracts is nearing record highs while actual physical exchange stocks of the metals are widely speculated to be at record lows. The so called “dumb money” – managed money shorts are once again pressing record short positions whilst the producers and swap dealers (the strong hands) are very evidently not inclined to sell here (moving towards the previous June 2014 record long position & which is contrary to the industry’s typical actions). Against this backdrop, as we can see on the bottom chart, the metal is at its most oversold on a daily basis as it has been for many, many years. The long term picture is also dramatically oversold




How does the above scenario unwind then? Well, there could be a final attempt, as I alluded to in my article in June, to smash the price of the metal towards $16 dollars but, at that price point, I rather suspect that the producers would go “all in” on supporting the price and quite how the sellers of the record open interest futures positions would (a) deliver physical that simply is not there or (b) get the futures shorts back is beyond me… My guess is that we have another serious short squeeze to come. Squeezes can of course only come from deeply depressed environments like now & when it seems that prices can only go one way. If that is the casem then many of these stocks that have near halved in recent weeks could again see price rises running to the 100%+ in the weeks ahead.

Here is the current positioning (as at 23 Sep) of the various category classes in silver and gold futures. In silver, we can see thay the Managed Money (dumb money) class (highlighted in black) has moved back towards the record short position seen in mid June right before the $3 spike and that the Swap Dealers have moved to a net long. The latter is very noteworthy as very rarely are they in this position. In gold, net longs were cut again materially last week.

We can also see in this chart here that the Gold/Silver ratio has now taken out its previous recent years peak of 69 in the summer of 2013. In essence, silver is as cheap relative to gold as it has been for many, many years. Many people believe that the real ratio should in fact represent the natural supply relative to gold figure of 15.

Going into next week, the Kitco survey below tells us all we need to know about current sentiment on gold by industry participants. A measure of just 20% bullish is about the lowest on record.

We can see in the GDX & GDXJ ETF charts below that volume has been massive during the last several days. This is another sign of exhaustion selling (likely from forced liquidations) coupled with real institutional demand for these stocks. Ironically, actual physical holdings of silver via buying of the ETF has been hitting new highs in recent weeks – evidence or REAL demand for the metal at this price level. There are in fact so many signs of a serious bottom being put in place that I don’t have the room here to list them all!

Another chart that is instructive is the one below and which illustrates the growth in the world’s major central banks balance sheets relative to gold over the last 12 years. 

Combined global central bank balance sheets relative to the gold price

The dislocation is apparent for all to see. Something with such a long history of correlation is bound to revert to its logical economic path and as the BoJ & likely the ECB show little likelihood of shrinking their balance sheets in the years ahead, it is almost illogical not to expect gold to once again rise in sync with this expansion.



There is a saying in the markets – “sometimes you’ve got to be wrong to be right”. Translation – timing is the wild card when buying value – it can remain cheap and indeed get cheaper before the turn in sentiment comes. At this point of the game, we have been wrong in our timing on silver and gold stocks but, time will as ever be the ultimate arbiter of whether the valuation basis was “right”. We however remain resolutely long many of these stocks which are now trading at what we believe are a once in a lifetime bargain levels. Very rarely does such an opportunity in relatively liquid public markets arise and it pays to remember that true contrarians buy low in the midst of extreme poor sentiment where this a pervasive fear of further losses and you have the cushion of solid fundamental backings…

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