Why Gold, Silver And Mining Stocks Are Headed Lower

Includes: ABX, AU, GFI, HMY, NEM
by: George Kesarios

Another day another tick down for gold and silver. One of the reason for yesterday's drop was data showing eurozone factory activity contracted last month. Another reason has to do with a report on Monday showing manufacturing in the U.S. and China expanded by less than economists expected. In other words, there are many worries about the state of global manufacturing activity. Max Keiser on the other hand thinks that Bitcoins are the reason!

I have a more simplistic explanation for what is going on, and why I think both gold and silver will continue on a downward path.

Precious metals are not dynamic investments

In contrast to stocks, precious metals are not dynamic investments. They offer no dividends, there are no cash flows and they are worth what everyone thinks they are worth.

To some extent the same applies to stocks, however at least with stocks there is a benchmark for comparison. Interest rates, profitability ratios, dividends and a host of other metrics give us some idea of what a stock might be worth.

And since the value of gold and silver is in the eye of the beholder and does not conform to any known investment rule, then gold might be worth $2,000 today, but can also be worth $1,000 tomorrow for no reason.

Stocks today are cheap

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If you look at the table above from the WSJ, you will notice that the current P/E of the S&P 500 is 18 and the forward P/E is 14. In fact the odd thing is that the Nasdaq 100 is even cheaper!

Why do I bring this up? Ask yourself this question: Why would anyone buy into a bullion fund and earn no interest or dividends? One reason is if they thought the value of gold or silver (for whatever reason) would go up against cash or some other asset.

And while gold has been outperforming equities for many years, that does not mean gold will outperform equities forever. There will come a time when things will change. And if you look at the chart below, you will see things are already changing.

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The above chart shows the DOW/GOLD ratio. As you can see, equities have been outperforming gold as of late. I think this trend will continue and sooner or later the gold and silver crowd will come to grips with reality and will want to join the trend. And when they do, they will sell gold, silver, mining stocks and the entire space.

Bad technical picture

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The above charts show a very bad technical picture. If you want my opinion, if gold and silver break the shaded technical support levels that I show in the charts, then I think they will correct to much lower levels.

Investor fatigue

Investors who bought gold around $2,000 are already losing a lot. Investors who bought silver close to the $50 mark are losing their shirts. And if someone bought either, via some kind of a leveraged instrument, then they are probably wiped out.

Many years ago investors bought gold or silver because they saw someone else buy it. Today it's not that easy to find someone who has made money in gold or silver. You can find a lot more people who have lost money than those who have made money over the past two years. Also, many of those that have made money will probably want to cash in.

The dollar effect

The dollar has not crashed like many believed.

Mining stocks will correct even more

I have question for holders of Barrick Gold (NYSE:ABX), Gold Fields (NYSE:GFI), Newmont Mining (NYSE:NEM), AngloGold Ashanti (NYSE:AU) and Harmony Gold (NYSE:HMY).

These stocks have not made money for investors for over a decade (for some long term charts, read my last take here). While these stocks are not expensive, I have two questions:

1) If these stocks haven't performed over the past decade, when gold went from the mid $300s to just shy of $2.000, when will they perform?

2) What will happen to these stocks if the price of gold dips to $1.300?

If you ask me, if gold goes to $1.300, these stocks will correct much more than gold and some might even go broke.

Bottom line

I can find many more reasons for gold, silver and many mining stocks to correct. But it does not matter what I think, but what the market thinks.

The charts above show that things are at a tipping point. If current support levels are taken out, I think both gold and silver have a long correction ahead of them. As for mining stocks, the correction will be even more brutal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.