Betting On Mining Stocks' Higher Prices May Not Be Such A Good Idea

By: Przemyslaw Radomski | Fri, Jul 13, 2012
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Based on the July 13th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

All the fundamental factors that have made gold such a stellar investment for the last decade are still intact. Fiat money is still being produced on easy street around the world, which in turn fuels worries about the dwindling purchase power of the currencies; central banks are still accumulating gold; real interest rates are still negative so investors don't give up any interest rate by investing in gold.

However, there are several things that have been affecting gold negatively over the past few months, much to our dismay. One of them is the dollar's strength against the euro and gold's recent tendency to move inversely to the dollar and in line with more risk-linked assets. This has undermined some of its safe-haven appeal.

You can observe that for example in the HUI Index. Gold stocks are not only declining, but they once again do so faster than gold.

HUI Index

Let's take a look at the HUI Index chart (charts courtesy by http://stockcharts.com; if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge.) The miners have moved lower, declining for six consecutive days now. On Thursday, they closed below the 400 level. This is an important and bearish development.

The bullish, intra-day reversal seen on Thursday does not change the medium-term bearish picture which is in place here. A pullback has been seen recently following the significant March - May decline and it seems that a continuation of the decline may now be seen.

This is in tune with what was seen in 2008 but declines and rallies are less volatile this time as they are taking more time to play out. Nonetheless, the bearish implications remain, and mining stocks' investors should seriously consider limiting exposure if this has not yet been done.

Let us now move on to miners to gold ratio chart to see if miners are really underperforming gold.

Gold Ratio Chart

In the chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we see that the ratio declined heavily this week. This means that gold stocks declined much more than gold.

The ratio also had a pullback in 2008 - consequently, what we have seen since May is not overly surprising. The trend remains down and right now we appear to be in another wave lower within a bigger downtrend.

To finish off today's essay let us have a glance at our in-house developed technical indicator that was designed to detect extreme situations on the precious metals market.

SP Gold Stock Extreme #2 Indicator

Looking at the SP Gold Stock Extreme #2 Indicator, we see that it has suggested at least a temporary rally in the mining stocks - the indicator moved below the dashed line based on Wednesday's closing prices. The intra-day decline on Thursday followed by higher prices later in the session may have been what was suggested by this indicator a few days ago - the second part of the session.

Maybe more short-term rally will be seen or maybe not - at this time, it is unclear in our view as we have already seen a rally - in the final hours of Thursday's session.

Summing up, the outlook for the mining stocks is bearish for the medium term. The short term is a bit unclear based on the intra-day developments seen on Thursday. While situation in the mining stocks is important, the situation in Europe and in the main currency indices is truly critical as far as impact on precious metals sector is concerned. This is one of the things that we discuss in today's Premium Update.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

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

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

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 current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

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.

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