Tiho Brkan: Miners Are on My Watch List

The last PMs sector update I had on the blog was all the way back in early April of this year. In the article, I discussed Gold’s outperformance in Q1 of 2014 and the large number of bullish contracts that have built up, as hedge funds started herding with expectation of even higher prices (something that I disagreed with).

I do not usually do prices targets, but I did state that Gold could drop lower in coming months and quarters. Whether this happens before the bear market ends remains to be seen, but one thing is now certain – PMs selling pressure has eased… for now.

Chart 1: US equities are at record while PMs sector is near 3 year lows

PMs vs US Equities 

Source: Short Side of Long

Compared to the terrible drop in the first half of 2013, precious metals prices have now stabilised over the last 12 months. Annualised returns on Gold, Silver and Gold Mining Index are at -4%, -11% and -9% respectively. This is quite flat to be honest. We are now trending more sideways than anything else.

Gold has been swinging around $1,300 per ounce for months, while Silver’s volatility has completely died out around $20 per ounce. We probably haven’t bottomed out just yet, but the chart above shows that with S&P 500 is making record highs, Gold Miners are trading near their 3 year lows and at similar levels from a year ago.

In my humble opinion, there is quite a lot of value here relative to S&P 500. Even more so in the Gold Mining Juniors (NYSE symbol: GDXJ), which are down 80% from their highs in 2011.

Chart 2: Gold Miners are extremely oversold and look quite attractive

Gold Miners Performance 

Source: Short Side of Long

Even though I am carefully tracking GDXJ these days, the chart above shows the rolling quarterly performance of the larger Gold miners. I did warn back in March that the sector was overbought in the short term and could stage another sell off. We have been slowly but surely sinking lower ever since, however we have not reached an oversold level just yet.

It is difficult to predict the future (unless you have a crystal ball), but I do admit its quite possible for the sector to make lower lows in the near term. Personally, I wouldn’t be alarmed by this nor would I see it as a technical breakdown to sell. Instead, it could be a false move which presents a great buying opportunity and would be followed by a swift reversal.

Chart 3: Gold is outperforming miners but there’s positive developments

Gold vs Gold Miners 

Source: Short Side of Long

As most precious metals traders already know, the key buy signals usually occur when the Gold Miners start to outperform the yellow metal itself. The miners started of the year in a great fashion, rallying strong in nominal terms and outperforming Gold into the end of first quarter. However, in middle of March that outperformance rolled over. Another reason I am looking for a sell off is that recent Gold strength has not been expressed in the mining shares

Finally, some other indicators like Tom DeMark’s technicals, are also not yet at major buy signals (heads up to a friend in HK, dinner is on me next time around). Considering there is no capitulation just yet, I’d probably expect more selling before a buying opportunity presents itself. I’ll be updating the newsletter when I decide to purchase more Silver and add my first GDXJ entry.