The purpose of this article is to look at the technicals of the gold and silver mining sectors. The best trades are when technicals and fundamentals are both lined up; it's in the best interests of traders to be willing to wait until these conditions materialize.
My perspective is that fundamentals help answer the question of what to buy, and technicals help answer the question of when to buy. Although the technical picture remains weak for the miners, especially as they remain locked in a pattern of lower lows and lower highs, I will be pointing out some signs that the appetite for risk is improving.
I will be using the Gold Miners ETF GDX as a proxy for the sector and SIL for silver miners. The gold miners have been mired in a severe correction, on a short term and intermediate term basis. On a longer timeframe, it remains in an impressive bull market. The silver miners have also followed the same trajectory, albeit with even greater volatility.
Of course, in the long term, the driver of a stock price is the profits it will produce. Therefore, the miners are highly leveraged to the price of the metals they dig out of the ground. The varied price performance is evident in the four tables below for the gold miners, gold (GLD), silver miners and silver (SLV) over four different, important time frames.
February 3, 2012 - May 5, 2012 (Recent top till now)
|Gold Miners [GDX]||56.44||44.05||-22%|
|Silver Miners [SIL]||25.00||20.14||-19.4%|
September 8, 2011-May 5, 2012 (Miners all time high till now)
|Gold Miners [GDX]||66.63||44.05||-33.9%|
|Silver Miners [SIL]||28.75||20.14||-29.9%|
October 24, 2008-May 5,2012 [Last Major Bottom till now]
|Gold Miners [GDX]||17.59||44.05||150.4%|
*SIL was not created at this time
November 17, 2000 (Beginning of Secular Bull Market till now)
|Gold Bugs Index [^HUI]||36.0||422.0||1,072.2%|
* Due to the ETFs not being available at this time, I will be using the Gold Bugs Index which corresponds to GDX and actual Gold and Silver prices rather than the ETFs.
My takeaways from the price performance over these time periods are the following:
- During upswings in the precious metals space, miners outperform the underlying metals and silver outperforms gold
- During downswings in the precious metals space, miners fall harder than the underlying metals and silver falls more than gold
- Recently, the metals have softened but the miners are in the midst of a brutal selloff
- Despite recent weakness, the sector retains very impressive performance over a longer timeframe
Pivoting off this last point, the natural question emerges whether the bull market in precious metals has ended, or is this merely a correction within a bull market, with the purpose of transferring shares from weak hands to strong hands. I believe this is a correction, mainly based on the still improving fundamentals within the precious metals space. Typically, bull markets end when fundamentals and price divorce as exuberance and greed take price parabolic.
Finally, I want to examine relationships between sectors of the precious metals space to get a measure of investor sentiment. I believe that in the next upleg of the precious markets bull market, the precedent established in the tables above will continue. Therefore, its useful to see where we are today with various precious metals intermarket charts.
Click to enlarge.
From the tables above, its clear that during times of strength, the miners will outperform the underlying metal. This makes sense as once the metal price is above the cost of extraction, each dollar it increases goes straight to the bottom line for miners.
Therefore, this ratio is a useful tool for determining how optimistic investors are about the future. Currently, this ratio is indicating no signs that sentiment is about to turn. However, this ratio is also a useful contrarian indicator tool, as the best buying opportunities come with abysmal sentiment.
Silver and gold are inextricably linked. During periods when the precious metals traders become irrationally optimistic, we find that silver outperforms gold, and vice versa for periods of irrational pessimism. This ratio is currently confirming the findings of the miners to gold ratio chart, the continued weakness of this ratio is not an encouraging sign that "animal spirits" are close to entering the picture.
This ratio chart provides a much more encouraging picture. The junior miners (GDXJ) are smaller miners, many still in the exploration stage, therefore they are very highly leveraged to the price of the underlying metal. During the 2008 crash, many juniors lost 80%+ of their market caps while gold fell about 25%. Then, in the subsequent climb to new highs for gold, these same juniors galloped to exponential gains.
It's interesting that the juniors are finding more buying interest than large cap miners. It is one sign that some are willing to take more risk in the sector and bears continued watching.
SIL has been beaten up with GDX, however it has held up surprisingly well during this leg down in precious metals, relative to GDX. Its sending the same message as the junior miners chart, that some appetite for risk is returning. If traders/investors were in full risk off mode, they would be dumping SIL and GDXJ more aggressively than GDX.
Based on the above four charts, it can be said there are some nascent signs of speculative interest developing in the precious metals space. This growing speculative interest is a necessary ingredient for a strong up leg, unfortunately it is not sufficient for one.
Given the recent decimation of sentiment and price within the context of a strong multiyear secular bull market, I think this sector will offer spectacular opportunities in the near future for traders. However, the water is not completely safe yet from a technical perspective, although there are some encouraging signs.
I will be writing two future articles related to this topic:
- Looking at Fundamentals in the Precious Metals Space
- Examining the Miners to Gold Ratio at previous bottoms
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.