“The bottoming process in gold and gold mining shares continues to be an extended and frustrating affair. Nevertheless, the fundamental rationale for positioning physical bullion and gold mining shares seems more compelling than ever.
The metal dropped approximately 4.5% during the quarter, but the mining shares (basis XAU) dropped almost 19%. From the September 2011 peak of 227, the XAU had declined -26% to year end 2012 of the first quarter where it stood at 167. Until the end of 2012, the decline was orderly. The decline accelerated sharply in the first quarter of 2013, almost equaling the percentage decline during the previous 16 months.
The accelerated decline in the first quarter of 2013, in our opinion, suggests a capitulative phase in which investors are giving up on the notion of exposure to gold, and especially gold mining shares. The mining shares, which were already historically cheap at the beginning of the quarter, became even cheaper. Intense liquidation of GLD and other gold ETFs during the quarter (see chart below) also seemed characteristic of a broad capitulation. Gold, a favorite investment theme two years ago, has become toxic to many.
To recap the factors we believe led to the decline:
*Gold became overbought during the threatened government shutdown in August of 2011. As one of our favorite technicians stated, when the price of anything attempts to go parabolic, it must suffer from a hangover.
*The stock market has provided superior returns over the past four years.
*The numerous and cumulative sins of gold mining managements wore investor patience thin.
*As conviction in the upward trend of the gold price dissipated, the rationale for owning gold mining stocks disappeared.