Gold and Silver Mining Stocks - Still Worth Your Investment?

By: Przemyslaw Radomski | Tue, Oct 23, 2012
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Last Tuesday we posted an essay entitled Gold & Silver Mining Stocks Hold Well Despite Metals' Correction and we summarized it in the following way:

The correction in the precious metals market may not be over at this point, but when it is over, miners might finally outperform the underlying metals once again.

Let's see if this is still the case by examining the HUI Index chart (charts courtesy by http://stockcharts.com.)

$HUI (Gold Bugs Index - AMEX) INDX

In this week's medium-term HUI Index chart, we have mixed implications for the short term, but the outlook is definitely bullish for the medium term. The recent declines have not been that significant given the corresponding move in gold prices - and in case of the last several days - moves in the general stock market.

Speaking of the general stock market, let's take a look at how stocks fared recently.


Larger Image

At the moment of writing these words, we have the S&P 500 at 1413, which is a bit below the 2008 high, but considerably above the red rising support line that you can see on the above chart. Consequently, even if what we've seen so far this week is a beginning of a major decline in the stock market (which we don't think is likely because of the upcoming elections - The Powers That Be definitely don't want to see plunging stocks right before voters go to their booths), we will see a pause quite soon.

As mentioned above - the US election is just around the corner and this is a short-term reason to believe that a rally in the stocks will be seen in the following weeks, not a major decline. The open-ended Quantitative Easing program is a medium-term reason for a rally. Does it have to do anything with the title of this essay i.e. mining stocks? It sure does - for instance juniors are highly correlated with the general stock market, so the above is a positive factor for the former. This is confirmed by the coefficients in the correlation matrix (third line from the bottom), that can be found in our previous article.

GDX:GLD (MV Gold Miners/SPDR Gold Trust) NYSE/NYSE

In the long-term miners to gold ratio chart, we see that the ratio held quite well recently. The implication here is - once again - that declines in the mining stocks may not be as painful as in the metals themselves. After all, mining stocks rallied on Friday even though gold didn't. If a rally is indeed ahead in the general stock market, the miners may not be greatly affected by declines in the precious metals.

On the other hand, they may see daily declines (when metals decline) followed by a quick reversal (when metals do nothing and stocks rally) to the upside or simply small declines as compared to the metals. This is one of the reasons for which last week we suggested (in a Market Alert) closing short positions in the mining stocks and keeping those in gold and silver open.

We summarized our latest essay by saying:

Is the correction in gold over? Not likely.

At this point (with HUI at 490) it may be close to being over in case of mining stocks even though the short-term picture is rather blurry. The medium-term picture looks very favorable, though. If one wants to invest in the mining stocks in the medium- or long-term, then the question is if one should choose junior mining stocks or big precious metals producers (like companies that are included in the HUI Index).

At this point it seems that juniors offer greater potential not only because of the situation in the general stock market, but because of their own technical situation.

$CDNX (S&P/TSX Venture (CDNX) Composite Index) TSXV

In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), the outlook remains bullish even with the declines seen in precious metals' prices over the last two weeks. The index remains above its support line, and the outlook makes the picture bullish.

Summing up, even though the short-term outlook for mining stocks is a bit unclear, the medium term case is very bullish in our view - especially for the junior mining stocks.

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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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