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Gold and Silver Stocks - A Dramatic Change in Fundamentals or a Short-Term Anomaly?

By: Przemyslaw Radomski | Friday, November 16, 2012

Based on the November 16th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

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.)

GDX:GLD Market Vectors Gold Miners/SPDR Gold Trust Shares NYSE/NYSE

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.

$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), 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.

$HUI Gold Bugs Index - AMEX INDX

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 for diversification in 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 (gold trading vs. gold investment) 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 gold and silver portfolio structuring.

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.

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

 


To read the complete version of this study that is 11 times bigger, go to gold & silver investment website SunshineProfits.com and sign up for free. You'll find it under Premium Updates.

 

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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