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The first quarter of 2013 was ugly for precious metal investors. Gold posted its worst quarter on record with prices falling 23%. Silver prices fell by more than 35%. Gold and silver miners fared even worse. The chart below shows SPDR Gold Shares Trust (GLD), iShares Silver Trust (SLV), Market Vectors Gold ETF (GDX), and Global X Silver Miners ETF (SIL) year-to-date. Clearly for precious metals investors 2013 has not been fun. There are 3 things that need to happen for me to believe that any bounce in gold is for real.

GLD ChartGLD data by YCharts

Production Cuts

One major positive for the price of gold and silver would be major production cuts on behalf of miners. While it should be noted that different mines have different production costs, it is fair to say that we are nearing what is close to the average cost of production for miners. Cuts in production would do more than simply alter the supply-demand equation. Cuts in production would make it easier to value gold. One of the main negative arguments about gold is that it is difficult to value. However, if we see a lot of production cuts then market participants would likely begin to believe that the downside is definable. Golden Star Resources (GSS) has announced production cuts but, for the most part, production cuts remains mostly a talked about idea. Large production cuts from the likes of Barrick Gold (ABX), Goldcorp (GG), or Newmont (NEM) would be highly bullish for the gold price.

Chinese Market Stabilization

After India, the world's second largest consumer of gold is China. Recent indications are that demand for gold in China has fallen somewhat from recent levels. The Chinese stock market has performed very poorly so far in 2013 and some are now saying that a banking crisis has begun. A financial crisis in China would not be good for gold and silver, at least over the short-term. Any serious banking crisis in China would likely lead to significant deflationary pressures which would be a negative for gold. Think about the U.S. financial crisis in 2008, gold and silver prices fell sharply in the initial stages. Of course, gold and silver rebounded sharply as the crisis eased due to unprecedented central bank action.

Interest Rates Stop Rising

One of the major reasons for the recent decline in gold and silver has been the rise in interest rates. Higher interest rates mean more competition for yield-less gold. Sometimes, a rise in interest rates can be good for precious metals as it indicates rising inflation expectations. However, as bond king Jeff Gundlach points out, that does not appear to be the case right now. Instead, rates are going higher because the market is concerned about the Fed's move to likely begin slowing purchases in the near future.

Conclusion

While it may be tempting to buy gold and silver after the recent fall, the prudent thing to do is wait for confirmation. Production cuts, a stabilization of the situation in China, and a halt to the recent trend of rising rates would confirm a bottom in gold and silver.

Source: 3 Things That Need To Happen For Gold & Silver To Bottom