The monumental fall in gold and silver that few thought could get so bad so fast is soon to have some serious problems of its own. In the most recent week, we have heard of record shorting trades in some cases, and almost every analyst out there has downgraded gold and silver miners to the point that there is very little love out there. With the argument of write-downs and lower demand, it is getting to be time that the gold and silver miners start to take matters into their own hands.
The fear and expectations have been growing that gold mining companies would have to start taking serious asset value write-downs. The firms have been unable to avoid this entirely, but a fall gold prices from about $1,700 an ounce at the start of the year to under $1,250 now comes with a cost.
Demand still exists for physical gold, but the financial buyers and speculators were the ones that drove gold up and now they are the ones driving it down. If you believe in supply and demand formulas, the most obvious trick in the world is coming any day now. Gold miners have had many new projects delayed or blocked due to protests, government or court rulings, or geopolitical risks. It is time for the gold and silver miners to shutter many of their expansions and to simultaneously slow their higher-cost projects. If demand trends keep sliding, the only way to stabilize things is to crimp the supply.
Gold was down at $1,227 per ounce in late Wednesday trading, while silver was down to $18.58 per ounce. Stocks surged higher on Wednesday and the stock and bond market panic selling seems to have stabilized for the moment.
Silver Wheaton Corp. (NYSE: SLW) was downgraded to Neutral from Outperform at Credit Suisse on Wednesday, as were Barrick Gold Corp. (NYSE: ABX) and Pan American Silver Corp.(NASDAQ: PAAS). The rationale is as follows, and supports this thought:
- Barrick Gold — due to the confluence of gold price uncertainty, P&L uncertainty, debt, potential write-downs combined to lower the risk/reward profile for the company. Also it wants clarity on the path for Pascua and for handling asset sales and its financial leverage.
- Pan American Silver — due to lower silver price forecasts and the impact of potential impairment charges.
- Silver Wheaton — due to lower precious metal price forecasts and due to Barrick’s Pascua Lama project uncertainty.
Cutting production targets may have to happen a bit covertly or without formal declarations. Mines may close for “modernization” or perhaps companies will simply allow (or internally hope for) worker walk-outs and strikes. Miners may claim that they cannot work with existing environmental constraints. And maybe some will simply say that they cannot be expected to extract gold and silver from certain newer projects where the production costs were based on much higher gold prices.
It is hard to know which excuse here, or that we have not covered, will start to take hold. If gold prices do not stabilize, or recover, you can be almost certain that the production side of the equation will start to fiddle with the demand side. We have written many times about the name “The Devil’s Metal” being given to silver, but it is becoming true for gold too.