Gold & Silver Stocks - A Dramatic Change in Fundamentals or a Short-Term Anomaly?November 16, 2012, 1:21 PM
Based on the November 16th, 2012 Premium Update. Visit our archives for more gold & silver articles.
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.)
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.
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.
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 forin 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 () 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 .
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. Details regarding trading positions, changes (!) in the long-term investments and price targets are available to our subscribers. If you'd like to join them (and this is an excellent moment to do so, not only because of the critical situation in the market, but also because we will now send out Market Alerts on a daily (!) basis) you can do it.
In our previous essay we featured a list of replies to some of the questions that we answered in the previous months and since we received a positive feedback, we decided to provide the remaining replies also this week (excluding the latest - less than 2 months old replies that are reserved to our subscribers). Please note that since they are in the Q&A Panel, they are all universal meaning that they are up-to-date also today. Here's the list:
- Why do your indicators flash buy signals when your predictions are bearish?
- Which ETF is better: GLD or CEF?
- Why are your definitions of risk-tolerance and risk-aversion different than the general ones?
- Are short counter-trend rallies important at all?
- Could you recommend a book on behavioral finance?
- What impact would the nationalization of mining in Bolivia have on silver?
- Could you explain the terms: long position, short position, long-term position and short-term position?
- Why don't you provide trading signals for the general stock market?
- Which scale is better: linear scale or logarithmic scale?
- How do you define a breakout?
- Are restrictions on owning gold likely to be imposed?
- How high do you expect the gold:silver ratio to move?
- When will the U.S. dollar crash?
- If the dollar collapses, will I be able to sell my precious metals?
- Do you use the Hindenburg Omen in your analysis?
- Why don't you use the Elliott Wave pattern analysis?
- Is there a way to avoid the precious metals tax paradox?
- When does a junior stock come off the pink sheets?
- Could you give me some information on the PHPP ETF?
- Mining stocks going up on rising volume near the end of the session - is this a bullish signal?
- Should I buy gold priced in USD or gold priced in other currencies?
- Taking a bank loan to finance my investments - is this reasonable?
- Would a collapse of the euro bring precious metals down?
- Which mining stocks should I hold?
- If the bond market collapses, will precious metals decline?
- Will the maintenance margins for gold and silver rise in the future?
- Is there any difference between the Democrats and the Republicans for a precious metals investor?
- Should I short gold to protect my physical bullion?
- Can I use fundamental analysis alone?
- What if the CFTC makes an intervention on the derivatives market?
- Should I go long gold when the government prints money?
- What if the analyses we use are wrong?
- What if human nature has changed the precious metals market?
- My junior stocks don't perform well. Should I sell them?
- Can I profit on options even if I'm wrong several times?
- Don't your charts become outdated if the market conditions change?
- Which Indicator From the Charts Section is Most Useful for Me?
- Do you feel that the Canadian, US, and Australian stock markets will survive?
- I'm new to investing in Precious Metals - do you have a set portfolio or do you provide trading tips?
- Precious Metals are usually weak during the summer months. Why is it different this year, or is it?
- Volume is so important on stocks - does volume influence your option picks?
- Wouldn't small volume on the options market cause their price to spike if many investors buy at the same time?
- Why do we need graphs, slopes, etc.? Can't we just stick to fundamentals?
- Are numismatic coins better than junk coins?
- Does technical analysis work on manipulated markets?
- When do you expect the USD to crash and gold to sky-rocket?
- Are we in deflation? If so, will gold still rally?
- Fundamentals are awful and bound to cause a steeper decline!
- Do you agree that trading in gold may be banned?
- Junior stocks and their cash reserves
- Retirement: all in silver? Electronic silver?
- How can a silver producer be uncorrelated to silver?
- Your last prediction didn't play out as expected...
- You are reading charts in the wrong way
Thank you for reading.
Przemyslaw Radomski, CFABack