All the action continues to be in the precious metals markets. Overnight, gold surged more than US$50 from its low just under US$1,340. It was on its way to testing the April low of around US$1,320. When it became clear those lows wouldn’t be breached, it sparked a short covering rally.
Silver was even more volatile. After plunging to a low of nearly US$20, silver railed to US$23.25 before settling back to US$22.85 in the US session. From the lows to the highs of the day, that’s an approximately 15% price move. Wild stuff!
So does this represent a bottom, you ask?
‘Are you crazy?’ we reply. Bottoms form when people stop confidently predicting them. So far, we’re yet to hear of anyone bravely calling the latest reversal in the precious metals a bottom, which is a good sign. Those who have stuck their necks out previously have lost their heads, so the market has clearly done its job in breaking the confidence and spirit of the gold bulls…which is the psychological precursor to a bottom forming.
Anyway, time will soon reveal all.
One interesting aspect of the ‘psychological’ factor in gold is the way the mainstream media report on it. For example, countless news outlets gleefully reported on George Soros’s sale of gold via the gold ETF, GLD, as being bearish for gold.
But what they neglected to report on was Soros’ concurrent purchase of gold equities and options on junior gold miners. According to regulatory filings, he has around US$240 million exposure to gold and gold related investments as at May 15th. That’s hardly a bearish sign. See here for details. See here for gibberish.
Clearly, Soros is just responding to the terrible sentiment towards the gold sector by buying. It’s standard contrarian stuff. Yet the media twist it into a bearish gold story?
Whatever. Speaking of contrarian, there could well be a contrarian opportunity emerging in the mining services sector later this year. That’s the argument we’ve been making to subscribers of Sound Money. Sound Investments recently.
The sector is suffering the effects of the mining slowdown. There are profit warnings all over the place. In just the past few weeks, we’ve heard bad news from Worley Parsons (WOR), United Group (UGL), Coffey International (COF) and Transfield (TSE) just to name a few.
They are all suffering the impact of mining companies pulling back their investment spending on concern that China’s appetite for commodities is set to be much weaker in the years ahead.
But as often happens, what starts as a solid fundamental reason to sell a sector morphs into irrational panic. A falling share price encourages more selling as investors just want to ‘get out’ at any price. You’re seeing it now in the gold sector and will probably see it in the mining services sector in the months ahead.
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