Gold, Silver Price Signal Glittering Bargains

July 3, 2013 at 07:51


Gold and silver prices have been gutted during the few couple years. But as precious metals investors have done so many times in the past few months, many commodity traders are calling a bottom and think now is a bargain-buying opportunity.

This time around, they might be right.

First, a recap: Gold prices have hit their lowest level in almost three years after cruising down to about $1,180 an ounce last week. That’s a flop of about 35% peak-to-trough from highs above $1,800 an ounce last fall. Asset-backed ETFs including the SPDR Gold Shares and iShares Gold Trust have felt the pain in kind, and gold miners like Barrick GoldGoldcorp and Newmont have been pummeled even harder.

Silver investors are in the same boat, more or less. In 2011, silver prices topped out at more than $48 an ounce, then crashed to their current spot under $20 for a miserable loss of about 58%. The iShares Silver Trust has been brutalized as a result, and silver stocks including Silver Wheaton and Pan American Silver have also suffered deep declines.

But here’s what’s on the horizon for the precious metals markets after the bloodletting of the past few years:

The Charts Show Favorable Technicals: Renowned chart-watcher and commodity trader Peter Brandt of Factor Research has been bearish on silver since 2011 and on gold since late 2012. But he recently wrote that “the vast majority of the bear market in metals is over” — at least from a technical perspective. Also, gold prices seem to represent cyclical lows, according to New York consultancy CPM Group. Obviously headlines and sentiment matter, but the charts and price history indicate that we are seeing a floor here.

Production Costs Near Breakeven: In a recent interview with Silver Wheaton CEO Randy Smallwood, the metals exec said that breakeven for silver is “probably $20-plus, for an all-in capital burden cost.” He then said that gold’s breakeven is around $1,200, which “tells me we are at or near the bottom in the commodity price cycle.” JPMorgan commodities research puts a weighted average lower, at around $,1082, but that’s still not much room to drop before it becomes unprofitable to remove gold from the ground.

The Trade Will Work If You Wait: ”The Golden Dilemma” a report by the nonpartisan National Bureau of Economic Research that was released earlier this year, posited that gold is a volatile investment — trading at times above “fair value” and at others below it. The good news is that it always seems to return to the ballpark of “fair value” again … but the bad news is that it sometimes takes many years. The fair-value equation is always a slippery one, but it’s safe to say gold is not too far away from that point now that it is almost breakeven on production costs for many miners.

This is not to say that gold or silver cannot move lower. They might (and likely will) in the short-term.

But if you’re patient and willing to see these precious metals as a swing trade instead of a post-apocalyptic alternative to dirty Bernanke fiat dollars or a sure thing once the “paper gold” fanboys stop manipulating the market, it could pay off for your portfolio.

Remember, commodity investing is not much different than trading stocks. Don’t let your personal politics cloud your assessment of how Wall Street values gold and silver.