Charting The Carnage In The Gold, Silver And Mining Space

Includes: ABX, AU, GLD, NEM, SLV
by: George Kesarios

Gold (NYSEARCA:GLD) bulls cant say I didn't warn them. In February, I said time was running out to sell gold and silver (please consider: Last Chance To Sell Gold And Silver). In fact, I have written many articles on why you should sell gold and gold stocks and all things gold. Just several days ago, I gave one last warning here.

I have repeatedly said that if gold takes out critical support levels, all sorts of forced selling would follow and gold and many gold stocks will correct to much lower levels. However, the question is, why would gold break those technical levels, if everyone has been so gung-ho on gold forever?

Well, Cyprus might have to sell some gold to get out of trouble, this will put some pressure on gold at the margin. Besides, Goldman Sachs thinks gold will go lower (link above). The Financial Times reported that Société Générale also thinks gold will correct and they currently have a target of $1,375 by the end of 2013. They are actually even more bearish than Goldman.

But if you want the best reason of them all, Barclays Capital (same article) said holdings in gold ETFs ended last year at a record 2,767 tons, but investors have withdrawn around 200 tones so far this year, with February registering a record monthly withdrawal of 111 tons.

Now that's a lot of redemptions if you ask me. And if you want my opinion, I think they will continue. The reason for this I have outlined many times in previous articles.

Deflation - both monetary and on the asset end - is not a friend of gold or silver. And I really can't understand the logic that deflation is supposed to be bullish for gold as many gold bulls think.

And for those who didn't pay attention on Friday, critical technical support levels were taken out and gold dropped like a rock (chart below). And as you read this article today, gold is falling by an additional 5%. In fact, the way it's falling, it might hit Goldman's $1,270 target in no time.

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Silver (NYSEARCA:SLV) support levels were also taken out on Friday. However there is a small difference between gold and silver. See, silver has already corrected by about 50% from its recent high (ouch) and has caused much more carnage than gold. And all those who have invested in silver via some sort of highly leveraged instrument over the past two years are probably history (AKA they have lost everything). All others who were a little less greedy, and decided to use plain vanilla margin to play the space, are probably being harassed by their broker on a daily basis to cover margin. And as of this morning, the carnage continues, with silver falling about 7%.

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The case against gold and silver stocks

In the past, I have outlined my case against the mining space. The logic is quite simple. Since these companies did not benefit investors all these years, when gold went from $300 to almost $2,000, why should anyone expect that these stocks will perform and make money for investors with prices falling?

Also, assuming that the bear predictions of Goldman play out (a sure bet I say), what can one expect from these stocks with gold at $1,270? If you want my opinion, not a lot. And if you didn't know it, anything that does not have a clear buy rating on Wall Street has sell written all over it.

And that includes stocks with a hold rating. And the last time I checked, I didn't find that many mining stocks with a buy rating. In addition, even the stocks that are rated a buy today will probably be rated as a sell because the fall of gold and silver changes the financial dynamics of many miners.

Charting the carnage

Barrick Gold (NYSE:ABX) is dropping like a rock on a daily basis. Over the past week alone, the stock has lost about 25% of its value. Currently, the stock has returned to 2005 levels. However, if one takes a close look at the chart bellow, Barrick is slightly higher from the highs it registered in 2002. A whole decade lost.

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AngloGold Ashanti (NYSE:AU), another gold heavyweight, has lost 2/3 of its value from the highs it registered several years ago and is also falling like a rock. The stock's price has retreated to 2002 levels. Buy and hold investors have nothing to show for a decade of patience.

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Finally, Newmont Mining (NYSE:NEM) has also been a gold crowd favorite. But those who have bought and held onto this stock over the years, also have little to show for it. The stock has returned to 2004 levels.

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Final words on gold, silver and the whole precious metals space

I never bought the argument that gold is money. Gold is just another asset that can be exchanged for money. Like everything else, its value will go up and down and will fluctuate in terms of cash.

Yes gold is indestructible and can under certain circumstances be a store of value, but the same argument applies to vintage Gibson guitars.

The market is usually right and the market cannot be manipulated. All those who believe in market manipulation just don't understand how big markets are and how impossible it is for any one firm or central bank to manipulation them.

All those who believe the gold market is being manipulated by some invisible hand or by the central banks, because they want to take your gold away from you, can continue to do so, but at your own risk.

Just ask all those who bought silver at $50, I am sure they would be glad to exchange their silver for the money they paid for it over the past two years.

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.