To date, futures prices for gold have given up more than 7%, platinum has plunged at least 18% and copper is down more than 16%, while key indices for the mining stocks, including the Philadelphia Gold and Silver Index have dropped by 30%. This made metal-mining stocks cheap - in relation to the declines in metal prices.
Gold futures recovered on Monday, settling at $1,096.40, and currently trade at $1,095.10.
Last week, mining giant Anglo American PLC unveiled plans to slash roughly 53,000 jobs in its workforce over the next few years to cut costs.
South African miner Lonmin PLC which producing platinum and gold among other metals, has plans to reduce 6,000 employees over the next two years because of falling prices and rising costs.
“Layoffs and mine closures are the signs of a market bottom and signal capitulation,” said Jeb Handwerger, president of Mining Development Corp. and editor of Goldstocktrades.com, in an email interview. They are now widespread since the production costs at many of these mines "are higher than the spot price. Many of these mines are no longer profitable.”
“Markets like we are experiencing today set us up for the next supply
shortage and potential price spike,” Handwerger noted.
But the sector isn’t quite ready for a spike yet, says MarketWatch reporter Myra P. Saefong.
Tom Essaye, editor of The 7:00’s Report, expressed worries that the Market Vectors Gold Miners exchange-traded fund is “still too expensive.” GDX has given up about 25% so far this year.
In a report Friday, Essaye said that the GDX is trading at a price-to-book ratio (price of a security in relation to its book value) of 1.24 - while a reading above 1.0 is an indicator that it is overvalued.
And the market is in “a still-falling gold environment,” Essaye said. So that is “just not cheap enough” to warrant the risk.
Cannot make profit
According to analysts, metal prices are now close to levels at which miners cannot make profits.
Most gold and silver mining firms are now operating on extremely thin margins, according to Ken Ford, president of Warwick Valley Financial Advisors. One of the very first options has been cutting jobs. But most are trying to avoid care and maintenance as it can cost a fortune to keep a mine in this condition, he noted. However, they do not have a choice.
There
are many big gold miners “who can’t make it at $1,500 right
now, let alone under $1,100,” said Handwerger.
Senior investment strategist at U.S. Bank Wealth Management Rob Haworth said average mining costs are near $1,000 an ounce. However, as prices fall below key levels without a rise in physical demand, production will likely need to be closed. Until that happens, traders should proceed with caution.
"If you think gold is bottoming here, and you want to express that via a gold-stock long position, look for specific names that have projects coming on line that will result in an uptick of higher margin production, lower costs and hopefully some hedged pricing,” Essaye commented.
