Seeking Alpha

Przemyslaw Rado...'s  Instablog

Przemyslaw Radomski, CFA
Send Message
Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same. His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the... More
My company:
Sunshine Profits
My blog:
Sunshine Profits' Articles
  • Sunshine Profits: Gold & Silver Stocks – A Dramatic Change In Fundamentals Or A Short-Term Anomaly? 0 comments
    Nov 16, 2012 1:30 PM | about stocks: GLD, SLV, GDX, UUP, UDN, SPY, DIA, DGP, DZZ, DGZ, UBG, UBM, USV, PTM, PTD, JJM, JJN, IAU, GDXJ

    Gold & Silver Stocks - A Dramatic Change in Fundamentals or a Short-Term Anomaly?

    Based on the November 16th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

    Stock exchange is a very volatile, emotion-driven place. Even though most of the time one can predict future moves in particular assets with decent effectiveness, every once in a while abrupt and unexpected market moves take place. And we have just seen such violent and heavy declines in precious metals mining stocks.

    Sadly, no one is able to foresee the future with 100% certainty and this is why diversification is such a crucial concept in investing. It would have certainly protected gold & silver investor's profits or at least diminished their losses had they invested not only in mining stocks but also in metals themselves.

    Now, the following question arises - is this a sign of some important change in the mining stocks sector or just a short-term anomaly? Let's take a look at the charts to find out - we'll start with the miners to gold ratio (charts courtesy of http://stockcharts.com.)

    (click to enlarge)

    On the above chart, we see that the ratio plunged this week. This is seen every few months and is almost always followed by an immediate reversal and a rally in prices. This can be seen in August 2011, October, 2011 and January, 2012. Very sharp declines are followed by strong rallies, and this is also seen in early July 2012. This was actually the final buying opportunity before a strong rally emerged in gold prices. At that time, the RSI was extremely oversold, and this is the case today as well. Although it may be difficult to believe, the situation is still bullish in this chart.

    Now, let us move on to junior mining stocks.

    (click to enlarge)

    In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see a move below the horizontal support line. This move was sharp, sudden and has not been confirmed. We expect to see an invalidation of the move in the coming week. Since this breakdown was not confirmed, the situation has become only slightly more bearish this week. Not much weight is placed on this signal given the situation in the rest of the precious metals sector.

    Finally, let's have a look at gold senior mining stocks.

    (click to enlarge)

    In this week's medium-term HUI Index chart, we see that the index has moved to a combination of support levels. The plunge was dramatic and took the RSI to 30. This had not been seen since the final 2012 decline bottom. Prior to this, it had only been seen a few times. With the situation extremely oversold from a technical perspective, a sharp pullback is likely here.

    We would like to reiterate what we wrote at the beginning of today's essay: this week's declines are an excellent example of a need for diversification in trading, even though the precious metals sector is closely correlated in most cases. We recently suggested buying gold, silver and mining stocks when gold was at its 300-day moving average. Gold and silver positions are now profitable and mining stocks ones are not due to this week's decline.

    Please keep this in mind for future trades: remember that using signals from various sources can protect you from most of the anomalies of this kind. Yes, we believe that this week's action in mining stocks should be called an anomaly. Although the miners follow stocks (in case you believe this decline could have been predicted by looking at stocks' decline), please note that so does silver in many cases due to its multiple industrial uses. This week, we saw declines in the miners along with stocks but not in silver prices. In the last few days, the miners declined heavily and silver not at all. While we can't be prepared for each single outcome because there are too many of them, you can really limit the risk and your exposure to such anomalies through diversification. One way to follow this principle is to take positions in many parts of the precious metals market, another one is to diversify between strategies (gold trading vs. gold investment) and there's also one that is based on diversifying sources of signals. You can read more about all of them in our report on gold and silver portfolio structuring.

    Summing up, the decline seen in the mining stocks was very dramatic. This was virtually the only part of the sector that looked so bearish. Miners can be quite volatile on a short-term basis and we expect to see similar volatility when the rally resumes. We view the current performance of miners as an anomaly that will soon disappear when metals continue their upswing.

    To read the complete version of this study that is 11 times bigger, go to gold & silver investment website SunshineProfits.com and sign up for free. You'll find it under Premium Updates.

    Thank you for reading. Have a great and profitable week!

    Przemyslaw Radomski, CFA

    Founder, Editor-in-chief

    Gold & Silver Investment & Trading Website - SunshineProfits.com

    * * * * *

    About Sunshine Profits

    Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

    Disclaimer

    All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Back To Przemyslaw Radomski, CFA's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.