The precious metal market has experienced great difficulty for the last 6 years or so as gold and silver prices were beaten down. However, they are now moving higher largely due to a stock market that is in a corrective mode and a Federal Reserve that is in dovish mode. Investors in the stock market are looking to rotate into new market sectors and the Fed’s rate hike cycle looks to have come to an end removing support from the US Dollar. As the dollar weakens gold prices improve as they have an inverse relationship.
Our expectation is that the precious metals stocks will become more profitable and therefore more attractive to the investment community and could even become the “darlings” of market as the media begins to feature them more often and without the distaste that they have for them at the moment.
With this in mind our focus is primarily on the PM stocks as conventional wisdom tells us that they can move in a ratio of 3:1 or better when a rally gains some traction. The possibility of leverage to any given trading opportunity appeals to us as it offers us the chance to maximize the profits on a particular trade.
We chose to use this Index because it is largely a basket of unhedged gold stocks containing a portfolio of 15 major gold mining companies. Mining companies that hedge their production are locked into a delivery price and are not subject to the fluctuations of the price of gold. If we believe that the price of gold will be higher in the future and we do, then we want the exposure to those price fluctuations as they will result in higher stock prices.
Today we will take a quick look at the HUI and its relationship to gold prices.
Chart Of The HUI
As we can see from this chart the miners are having great difficulty getting above resistance at the 170 level so it would appear that the precious metals mining sector is still unloved unwanted and largely ignored by investors, however that situation maybe about to change. The chart also shows the formation of a golden crossover which is usually a positive indicator on any chart.
Gold is the underlying commodity upon which The Gold Bugs index depends so should gold and silver rally from this point then there is no reason why the HUI should not do very well indeed.
Since Labor Day in the US, 2nd September 2019, gold has steadily improved and this chart shows that the PM stocks have followed suit. During this period gold has risen 10.6% and the HUI has risen 22%, so the ratio is 2:1 at the moment.
Comparison Chart Of Gold And The HUI
The following chart compares the HUI and gold from roughly the year 2000 up until today. It shows how the gold miners can race ahead when the price of gold is in the ascendancy and how they decline in dramatic fashion when gold enters a bear market. Also note that golds recent upturn has triggered a rebound in the PM stock prices.
Gold is moving higher and the precious metals are starting to respond accordingly.
It is now a question of timing and stock selection for those who want to secure a trade whereby a stock increases in percentage terms at a rate of 3 or 4:1 to the price of gold.
As this bull market gets underway some stocks will outperform the HUI and some will underperform the HUI. It is incumbent on all of us to do the work and identify those good quality stocks that will return a stellar performance on the back of golds advance.
As gold moves higher, poor mans gold, silver will also join in the fun and as 84 ounces of silver can be purchased for the price of one ounce of gold, we would expect demand to run hot proving the occasional sling shot in terms of performance in silver prices.
Finally, go gently and only deploy what you can afford into each stock as mining is a precarious business.
You must have a comment so please add I to the commentary as the more diverse comments we get the better informed we all become making our trading decisions more profitable.
Take good care.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.