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Which Precious Metal Sector ETF Will Perform Better ?

Oct 22, 2013

One bright spot that showed up in the markets on Monday was the junior stocks in Canada as represented by the CDNX Venture Index, which just broke out of a declining Wedge pattern from Feb 2011. This seems to indicate that the junior mining stock washout is now complete and should represent better times for all precious metal investments. The chart below shows the CDNX Venture Index plotted above Gold and Silver in the same chart, with vertical lines to highlight the highs and lows so you can see how sometimes the CDNX anticipated or correlated with the tops and bottoms in Silver or Gold.

CDNX Venture Index - $CDNX - Daily (click chart to expand)

However, before you decide to jump into a broad based junior gold stock fund, you might want to look at the next chart below. This shows the CDNX Venture Index relative strength ratio against the big cap XAU gold stocks and while it did outperform the big gold stocks since late 2012, it has now formed a double top of sorts that says the big cap golds will outperform the juniors for some period of time. That's not all bad, because it is a good sign that the precious metal prices should have quite a sustainable move up. The red sub-chart above the CDNX/XAU ratio chart is the 65 day Rate of Change and I have highlighted positive and negative divergences to indicate where the change in leadership occurs, and the lower sub-chart again is silver and gold. The current pattern in the ratio may be developing into a broadening pattern, in which case the ratio could go down as low as 8.00, otherwise it would likely go to either 8.25 or 9.10 as indicated by the horizontal support lines. This could take anywhere from 2~6 months before the leadership shifts back to the juniors.

CDNX / XAU ratio - $CDNX /$XAU - Daily (click chart to expand)

On the other hand, if you compare the silver stocks, as measured by the Silver Miners ETF (NYSEARCA:SIL) to the XAU, you do not see any relative weakness as indicated above. Instead the Silver Miners ETF looks strong and that it will continue to outperform the gold producers. This is why in my Oct 15 Blog article "What's Better Than Silver?" I only recommended to buy all silver based equities at the market price that day. The chart below shows the SIL/XAU ratio with 65 day momentum above and the SIL chart below. Again, the divergences on the 65 ROC are highlighted to show change in relative strength leadership and you will note that there is no divergence between price and momentum during the recent Aug~Sep highs, and the subsequent correction has reset the momentum to allow more upside action. Also, the ratio's action since the beginning of 2011 has been bullish against the XAU and the breakout above the horizontal resistance line in Oct 2012 is also a positive that has created an upward trend channel for the ratio. On the Silver Miners ETF-SIL chart below the ratio, I have indicated with horizontal lines the two possible price objectives for this move.

SilverMiners/GoldMiners ratio - SIL/$XAU - Daily (click chart to expand)


Oct 22, 2013

Peter Vogel




Disclosure: I have taken positions on Oct 15, 2013 in the following silver ETFs - AGQ, USLV.

Disclosure: I am long AGQ.