Are Gold Miners Leading Gold?

The miners peaked five months before Gold and are now one month from the 4-year anniversary of their market.

The miners will typically lead Gold at major turning points. We say typically because the trend in the relationship is hardly exact or precise. There can be times when the miners are simply showing their beta (not leading) and there can be times when the miners are leading but their leadership suddenly halts or reverses. The miners peaked five months before Gold and are now one month from the 4-year anniversary of their market. The time seems ripe for the miners to lead Gold into the next bull market.

In the chart below we plot GDX/GLD, GDXJ/GLD, XGD.to/GLD and Gold. With the exception of GDXJ/GLD, these ratios climbed strongly. Of more important is that the ratios have held near their recent highs while Gold corrected nearly its entire advance in January. Gold lost roughly $100/oz and is threatening the $1100s again yet the miners have maintained most of their gains.

The relationship between the miners and Gold threw us a major head fake last summer. The miners were trading near 12-month highs relative to Gold and on the cusp of a major breakout. That potential head and shoulders breakout for GDX and GDXJ completely failed. Gold’s relative weakness proved to be a bad omen for the miners.

Why might things be different this time around?

The miners are far more oversold now compared to then. At present the miners are just about four years into a bear market that is undoubtedly the second worst of the past 70 years. Last August the miners were eight months into a rally. If the bear had ended in December 2013 then it would have only been slightly more than two and a half years old (versus four years now).

Two other things bode well for continued leadership from the miners. First, the collapse in Oil is a huge boon for mining companies. Energy can account for 25% or even as high as 30% of a miner’s costs. Second, foreign currency weakness is positive for some companies. This has to be examined on a case by case basis. If the Gold price in US$ is stable but foreign currencies such as the loonie lose value then it is another benefit to the mining company (that pays its workers in loonies).

The fact that the bear market in miners began five months before the bear in Gold and is nearly four years old gives us reason to anticipate leadership from the miners in 2015. Macro developments in the energy and currency markets have catalyzed a better fundamental environment for miners and their potential to outperform Gold. In the scenario that Gold makes a new low, GDX would have to decline 22% to test its daily low. Because of the stronger fundamentals for miners and the extreme long-term oversold condition, I don’t think miners would make a new low. That means the next leg higher could take miners into a new bull market.

By Raphael Thurber

Raphael Thurber is a respected resource writer and editor. A graduate of the College of William and Mary, Raphael is a longtime contributor to Yahoo Finance, with an interest in resource and investment journalism that spans over 10 years. As Editor of MiningFeeds, Raphael is responsible for assuring that the site remains a valuable knowledge resource for those in the mining sector.

If you would like to receive our free newsletter via email, simply enter your email address below & click subscribe.

MOST ACTIVE MINING STOCKS

 Daily Gainers

 Australian Mines Ltd. AUZ.AX +900.00%
 Adex Mining Inc. ADE.V +50.00%
 Casa Minerals Inc. CASA.V +30.00%
 Rare Element Resources Ltd. REE +26.63%
 Astro Resources NL ARO.AX +25.00%
 Tearlach Resources Ltd. TEA.V +21.05%
 MacDonald Mines Exploration BMK.V +16.67%
 GME Resources Ltd. GME.AX +16.67%
 Standard Lithium SLL.V +16.42%
 Black Iron, Inc. BKI.TO +16.28%

Download the latest Solaris Resources (SLSSF) Investor Kit

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

MiningFeeds will use the information you provide on this form to be in touch with you and to provide updates and marketing.