Gold Benefits versus Mining Costs

An important swing in the pendulum is due to manifest itself in the near future. Leverage with gold mining stocks and silver mining stocks depends upon containment of costs. Whether of energy costs (primarily diesel), or materials (like steel & lumber), or labor itself (also in shortage), even equipment (rigs in dire shortage with long waiting periods), the mining firms need to contain costs in order to make their stocks effective investments from which to exploit the rising gold & silver prices. The biggest breakout in the entire collection of commodity prices during the last two months has been in crude oil, with much attention given it. The gold price hit 1000 then pulled back. The silver price hit 21 then pulled back. Crude oil hit 100, then promptly continued its powerful march to 135. Energy prices might be on the verge of a pullback, even a powerful pullback. My forecast is for a pullback to 100 in crude oil this summer, which is soon to begin. The topping process is underway. Bank destruction will push the gold price back above 1000 again, at a time when the energy prices soften. This should vastly improve the business profitability of mining companies. The totally unreported story lately is that banks face larger losses, as housing prices continue their historic decline, ensuring profound additional bond losses. Banks have openly admitted it. Watch for the bond insurers to basically go bust, belly up, after failing to replace their capital core. The charts tell the story. The financial press networks do not, as they continue to obey their advertisers who pay the bills and dictate the messages, even if totally false. This USGovt Administration might do well to formalize a new cabinet post, Secy of Information, in keeping with a tradition started seventy years ago in Berlin.

When the system reacts to the next round of bank losses, the further breakdown of the USEconomy, and the ongoing corporate failures complete with mammoth job losses, the response will be of vast US Federal Reserve and USGovt stimulus, rescue, and actual programs. We are at the verge of an even more relentless rise in monetary inflation. It requires pressure valves. The recent beneficiary has been crude oil, but next is gold & silver. In my opinion, the USFed is impatiently waiting for the USGovt, via the Administration and Congress, to initiate its important programs for mortgage relief. No progress has been seen in months for the New Resolution Trust Corp to revive the secondary mortgage market, to create a burial site for critically wounded mortgage bonds, and to negotiate new loans in refinance of growing numbers of under-water home loans. The Case-Shiller home price decline for the 20 major metropolitan areas in March was 2.2% monthly, or 14% annually. This means home prices are accelerating downward. That should be been a loud ugly wakeup call, but it failed to attract attention or marshal forces into action. SO THE ONGOING HOME PRICE DECLINE AND FAILURE TO INSTALL A NEW R.T.C. GUARANTEES THE NEXT ROUND OF BIG BANK LOSSES. The charts tell the story. My words are less necessary.

The crude oil price seems to be straining near a possible near-term top. At least official efforts are being designed toward that end. Global economic slowdown is a reality. North America and European Union show the signs of strain. Asia will soon, probably after the Olympics this August in China. If not less physical demand, reduced speculation from goofy Congressional rules proposed against speculators will discourage their bets in crude oil. We are likely to see a migration toward something else. My guess is gold & silver, especially after the Big Second Round of bank destruction is painfully evident.

The XLE energy stock index is a good forward indication of any imminent rollover toward a lower crude oil price. It has indeed signaled a lower price. My forecast is for a summertime decline in crude oil down to the 100 mark, with the first thud to 110. A long uptrend has lasted over three years. The preliminary initial signs are evident of a breakdown in that uptrend. A breakdown correction is coming for the XLE stock index, down to below the 80 level, and toward the 75 to 80 range where the moving averages await. The correction in the XLE gives a strong signal of imminent correction in the crude oil price.

The gold price has recovered in the last month. Next it must gather itself, consolidate for a week or so, before it continues upward. This chart is extremely bullish to technicians, resembling a launching pad. Support is to be found at the 920-930 range. Support is also offered from the 20-week moving average around the 900 level. The bullish stochastix crossover is important. The next gold price target is still 1150 to 1200. The response to the bank sector will be huge, as a whiff of panic enters the room.

The Oil versus Gold Ratio represents the benefit versus cost ratio for precious metals mining firms. The profits are derived off gold output. Their expenses contain energy as a major component. The ratio is ready to fall, signaled by a possible crossover soon in the stochastix indicator. Notice a sizeable gap in the 0.127 to 0.131 range, which usually is filled over time. The big upcycle this spring eclipsed the high levels established from summer 2006 to autumn 2007. Next comes the pendulum swing back toward the mean, in a reversion. Profits from energy investments are due to roll into gold.

The XLE versus HUI Ratio represents a good forward indicator on the benefit/cost ratio for gold mining firms, in energy producers versus miners. The XLE and HUI stock indexes each concentrate most weight on the bigger firms. A reversal seems evident and underway. The correction shows progress a little ahead of the commodity ratio of oil versus gold above. The same type of gap is evident, in need of fill. It also shows a possible crossover soon in the stochastix indicator. This chart is very unstable. A move down comes imminently.

The BKX bank stock index is staring at the precipice, for huge additional declines. The technical breakdown receives little press or network coverage, probably because it smashes their propaganda messages from the last month or more. The bank recovery is nowhere visible. In fact, several important banks have announced increased expected losses in just the last couple weeks, precisely as my forecast has stated consistently and without hesitation. Housing prices are accelerating downward, which precede yet another round of bank bond losses. My forecast is for future losses to be centered mainly in the prime rated category, and losses to be larger in magnitude than the subprime category. Prepare for a second bigger and more painful round of bank destruction. Their balance sheets are depleted of capital. They are not prepared with loss reserves or basic remaining capital to withstand what comes next. Their core capital is on a net basis totally borrowed. Major bank names and many midsized banks will be forced into bankruptcy in the next year or more, as they fail to resupply cash into capital. Another major breakdown is in progress. The bearish triangle base, shown recently in another public article, has been breached. The target is 56 in an earth-shattering decline. Even Goldman Sachs was downgraded by a major analyst this week. Be clear in the message, that the entire US financial industry is insolvent, in ruins, and not easily remedied. The sector has been led to the toilet by housing bubble that busted dramatically in a very predictable manner. A nation cannot build an economy atop a housing bubble and expect to survive.

The HGX homebuilders stock index also shows a dire decline continuation, as they face ruin. Their stated losses have not abated at all. Of course, with record high home inventory for sale, the builders must stop building homes, which strains the inventory glut. That simple fact is missing by analysts, maybe since poorly trained in economics, and since compromised by paychecks. This beleaguered group has already faced two major stock index declines. They are due for a third imminently. The pennant pause pattern shows early signs of breakdown. During the entire six months of consolidation, notice no improvement to the moving average alignment (in red & blue). They remain in downward bias. The housing prices continue down. A national insolvency story is not properly being told. This homebuilder group must go extinct.

The MFX mortgage finance stock index shows yet more devastation. This index receives little attention. The mortgage industry faces ruin also, especially since fees from refinanced loans are a virtual impossibility. That is the urgent need! Another important decline comes imminently. The 50% decline last autumn will be repeated. A new bearish triangle is evident, which also displays a breakdown. The target is 26 in the next few months. To date, 261 lending institutions have gone bust. Check the excellent website ‘Implode-o-Meter’ (click here) by Aaron Krowne for details.

The bond insurer MBIA is the largest, and it is doomed to go bust in dramatic fashion. This event is written in stone. If not the downgrade of its own corporate bond rating, then surely their payouts on failed mortgage bonds will kill them. The former makes recapitalization impossible, while the latter drains them into bankruptcy. As MBIA and its small group of competitors go down in flames, the bank industry will entire utter turmoil of unmistakable terms. Calls will be made for nationalization, as in USGovt takeover of bond insurance. Such calls will join those for the mortgage Resolution Trust Corp. While the self-serving nitwits in Congress argue with the syndicate representatives in the Administration, the national home equity and bank capital will continue to tragically burn. THE NATIONAL RESPONSE WILL BE MONETIZATION OF BANK AND EVENTUALLY HOME EQUITY BANKRUPTCY AND INSOLVENCY. Gold & silver will skyrocket as policy kicks into gear during desperate times. The irony, another black eye to the financial sector, is that MBIA will likely continue to bear a shiny AA or AAA rating, even as it goes bankrupt. That is a fine closing statement for this article.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com . For personal questions about subscriptions, contact him at  [email protected]