April 13th 2013: News flash! Gold miners are in trouble!

In case anybody missed it, gold miners are in trouble.  Energy costs are still relatively high and gold is getting cheaper.  Their costs for getting the metal out of the ground are going up - not down.  Ever helpful Goldman suggested shorting gold this week (but not 300 pts ago).  To make matters worse, large holders of gold and GLD (ex. John Paulson) haven't sold enough and GLD itself is selling into the market to match its index.  GLD has become the 6th largest holder of gold in the world behind France.  Canada, which has been historically known for gold production, has a paltry 3.4 tons of gold in reserve.  If GLD with 1158.56 tons of gold gets whacked 3%, that's equivalent to forced selling of ~34 tons of gold (or 10X Canada's entire holdings!).  But that's old news....

The big question is where do we go from here?  My short answer:  down (see chart)

Here's why:

• We've broken a huge trading range to the downside that took ~3 years to construct.
• There's an obvious head and shoulders pattern which projects much lower.
• In terms of historical similarity, the peak of 54.69 in Oct 2012 looks similar to the peak of 50.70 in July of 2008.  Using similar price destruction estimates, projects to ~17.5(!)
• We're into the monthly bar of the 15.48 low in Oct 2008 and often that leads to eventual testing of the low.
• The US dollar was down this week.  Imagine how much gold would be down if the dollar was actually up(!).  What if it gets back to the old highs of $88-$89??

Here's what we need for a bottom:

• ~1 month of rapid price destruction where almost every single day the price of GDX is lower.
• Margin calls.
• Large holders of GLD to throw in the towel.
• GLD to get materially smaller.
• Central banks to start buying heavily to counteract the compounding effects of GLD.
• Calls of removing gold from "diversified" portfolios
• Gold miners to announce they are stopping production en masse.