Monday, 2 January 2012

Miners' performance relative to precious metals

Abstract
The focus of this article is on the gold and silver miners from a tactical point of view: how do PM miners perform relative to the price of gold or silver. Data used are 2012 Jan 10.
Special attention is paid to the miners covered by the database 'Canadian gold and silver mining', for which a capital weighted index of gold- and silver miners is calculated. Aggregated performance is one thing, it's also very illustrative that miner and explorer performance has been diverging from outperforming the metals by a wide margin to losing ground completely.

An intro to earlier studies
During spring 2011, silver had been outperforming gold. As such it would not have been surprising to see silver miners really taking off. However, the relative performance of mining majors to the precious metals they produce has been disappointing, both for major gold and for silver miners. 


See: 

While these blog articles had a time perspective covering years or decades, the present blog page is monitoring whether the trends observed are persisting. therefore the graphs posted here are showing daily observations over 2011.

Unhedged Gold miners relative to Gold bullion 


Unhedged Gold Miners index HUI relative to gold bullion (spot market). Daily observations. Last update  Last update Jan 10, 2012 - click to enlarge.

Mining majors failed to prove leverage to gold. The HUI/Gold peaked as miners rallied until early December 2010. From 0.40, the middle of its post 2008 trading range, the ratio is down about 20%. In October the HUI/Gold ratio has been giving way twice with gold selling off and new stock market panic over sovereign debt. The HUI/Gold ratio dropped back near 0.31 - the level of the two August swoons - on several occasions: Oct 04 & 19, Nov 25 and it tested the 0.31 twice more (Dec 19 & 28) during the recent gold correction. Moreover mining stocks have again been sliding on a combined gold and stock market weakness. Through gold recoveries and pull-backs, HUI/Gold stays below its declining 200 dma. 

How did we drop this far?

Previous troughs of the HUI/Gold ratio could be "excused" because of PM weakness (end January) or a stockmarket correction (mid March). What makes it worse is that the past downtrend in the HUI/Gold ratio was well on its course during the gold rally, that has been bringing the yellow metal to its late April high above $1550. The onset of the early May gold correction just aggravated the downtrend, with HUI/Gold falling out of its trading range. The ratio has been breaking two important support levels that had held several months.
  • The 0.37 support broken late April held for 15 months, since early Feb 2010. It had been the bottom of the post 2008 trading range of the HUI/Gold ratio.
  • The 0.34 support broken early June held for 25 months: since April 09, in the aftermath of the secular financial crisis. 

Global X Silver Miners ETF (SIL) relative to silver bullion
The Nov 30 epic miner recovery confirmed a reversal of the SIL/Silver ratio. A sign of silver miner weakness abating is the 50 dma finally climbing above the 200 dma. In spite of the severe December silver correction, the SIL/silver ratio broke its resistence level last week. Miners are no longer following the metal, taken down by shortselling.

Silver miners are observed through the GlobalX ETF : SIL. Daily observations of SIL/Silver bullion. Last update Jan 10, 2012 - click to enlarge.

What preceded:
As the silver price accelerated towards Easter, silver miners not only couldn't match the stellar silver rise. They actually have been receding several days during the April parabolic silver rise upon political threats in Latin America. This made the SIL/silver ratio drop to 0.593 on Apr. 29, whereas we started that month at 0.75. (By then silver miner weakness was already the talk of the day) 
The overnight assault on the silver bull on Monday May 2 - with silver spiking down in thin trading as the Asian markets opened (and the LME was closed for the day) - wasn't entirely matched by the sell off among silver miners. 

The April 29 low on the SIL/Silver ratio was tested again on Aug 8 as miners plummeted on  stock markets sliding, in spite of precious metals posting gains.
The brutal silver sell-off we've witnessed last on Sep 22 and 23 was not matched by an equal decline of silver mining stocks, sending the SIL/Silver ratio up to 0.72. The SIL/Silver ratio seemed having found a resistance level at 0.72 at the declining 200 dma, with a wide normal trading range 0.62-0.72 which has been broken to the downside only for brief swoons. 
Alternating October& November swoons and recovery rallies later, the SIL/Silver ratio has been flirting with the declining 200 dma. While gaining foot early November, the ratio temporarily dropped back below the 200 dma.
After the slide had been ongoing for many months and we tend to forget that the 2010 "trading range" for SIL/Silver was more something like 0.77 - 0.88.

Canadian Gold and Silver Mining indices
No better illustration of gold miners underperforming than the capitalisation weighted gold miners index of stocks included in the Gold Miner Pulse database? Note that all quotes are in CAD, which has been fluctuating to the USD over the last months.
Compared to its $24.26 bargain price on Nov 19, 2010, silver still keeps up a 15% gain (in spite of the recent swoon). Silver miners are still at a 15.5% loss as of today. 
After over 13 months, gold rose 17% from $1342 on Nov 19, 2010 (GMP miners index starting at 1000) to $1566. The recovery since the October low had been dissipated by end November and nothing is left of the Nov 30 epic recovery either: the Gold miners index is losing 18.5% since Nov 19, 2010. Both the gold and silver miners index put down a new minimum on December 28, 2011 at the latest gold correction climax. (I needed adapting the vertical scale unfortunately.) 
Trimming down to their 2011 performance: gold edged up 11% over the year, while silver shed 9%. Over 2011, the gold miners index however lost 21.3%. Not surprisingly the silver miners index fell 27.6% last year.

Gold Miners index, Silver miners index and Equal Weight Index , base Nov 19, 2010 - Last update: Jan 10, 2012, click to enlarge

The third index added is an equally weighted index of all (silver and gold) miners on the GMP list. Because of its simple weighting scheme, comparing this index to the capitalisation weighted indices gives a fair idea of how junior miners and explorers fare as compared to the large miners. Though the index starts at 1000 in Nov-2010, there have been no early recordings. Early March, the 'equal weight index' had been outperforming the mining majors by almost 30%. By early Oct, the advantage had melted away completely. The index is still at a 13% loss. A nascent explorer outperformance isn't enough to cure the disease.

On the indices
The indices are calculated using the closing quotes of the Canadian gold or silver miners included in the GoldMinerPulse database. The indices are capitalisation weighted, much like the SP500 is designed.
Weights are determined on Nov-19, 2010 as an integer number of shares corresponding to the share of the company in the total market capitalisation of the segment: either the silver- or the gold miners of the GMP list. Large caps evidently are highly influential within the index, yet there is a ceiling for their index percentage share: The large weights of GoldCorp (over 23%) and Barrick (28%) are trimmed down to 20%.
The top six goldminers have a 70% weight in the 'gold-list'; those are ABX, AEM, AUY (YRI), EGO (ELD), GG (G) and KGC (K).
For the silver-miners, PAAS has a weight of nearly 12%, but the list counts only 34 components. This means the concentration is less pronounced. The five larger caps amount to less than 60% of the index weight; those are CDE(CDM), PAAS(PAA), SSRI(SSO), THO and SVM.
Observe that all quotes are in Canadian dollar; as such the index is biased as compared to the Unhedged Gold Bugs index (^HUI) or the Philadelphia Gold/Silver Miner index (^XAU). For your information, the HUI rebased to 1000 on Nov 19, 2010 is also included for comparison. This index only contains large cap miners, with a listing on the American exchange.
While focussing on explorers you can easily beat this index during a rally; however, during a downturn you'll have a hard time doing so. Apart from rounding errors, the index is set to start at 1000.
A fourth index is added, calculated as the return on a portfolio where all miners listed have exactly the same initial weight, as when investing the same amount of money in each miner (bluntly making the arithmetic average of all percentage gains since the index was started.
There have been a few compositional changes, for which the indices have been compensated. On November 25, 2011 weights were recalibrated. the above large cap percentage shares refer to this date.


Performance list
There is an important disparity among the gold and silver miners of the GMP database. Some lucky picks have been outperforming silver or gold by an impressive margin. A number of laggards have lost considerably. Barely a third of the miners are above their Nov 19, 2010 mark.

Ever increasing disparity of the miner performance since the inception of the index on Nov 19, 2010 - Updated Jan 10, 2012 - Click to enlarge

On the left, you find Kiska Metals Corp. : at -77.6% the red lantern of our list. Five miners lose 70% or more: 
  1. Kiska Metals Corporation
  2. AM Gold Inc.
  3. Golden Minerals Company
  4. Crazy Horse Resources Inc
  5. Eco Oro Minerals
Crocodile Gold (partial take-over bid) and Harte Gold escaped from the "danger zone".

Pretium Resources at the right more than doubled. However, four more miners are running off scale: Rye Patch Gold, Treasury Metals, NGEx Resources  Inc. and Wilcat Silver (with gains of 137%, 138%, 200% and 217%).

A more detailed analysis is found in "Canadian gold- and silver miner performance". A fresh set of graphs is included on the page "miners news". 

Performance benchmark of Junior miners versus Majors
Both ends of the performance scale are exclusively populated by junior miners and/or explorers. This illustrates the potential of juniors to outperform with favourable news hitting the wires. Since a couple of months, juniors and explorers have on average been lagging major miners. The few 'bright spots' don't make up for that.

In two articles the junior benchmark index used by the GDXJ ETF and its performance relative to the Philadelphia Silver&Gold miners index (XAU) is explained. Below you find an updated graph similar to the one in the above posting:

Market Vectors GDXJ index (red, left axis) and Philadelphia Gold and Silver Miners Index (blue, right axis) - last update: Jan 22, 2012. - click to enlarge

Since early April, junior miners ceased to outperform mining majors. Juniors nor majors were able to keep up with the pace of the gold price rising during summer. Whereas miners withstood a first pull back of the gold price rather well, the correction in the second half of September turned out to be dramatic. Junior miners and explorers paid a high price and much of their advantage over major miners has been melting away. In a nascent recovery towards end October junior miners and explorers bounce back. That doesn't however end the period of juniors lagging the majors as the sell-off gained momentum with the latest gold correction.

GoldMinerPulse database and Fundamental analysis
I made a detailed evaluation of the GoldMinerPulse database. The concept of a global score for miner evaluation, put forward by Will Wong, was further developed and fine tuned to evaluate miners on an objective basis across orders of magnitude of resource base, valuation per ounce, grades and completion stage of exploration.
The information related can be found at Valuation Metrics of Canadian Gold and Silver Miners
A new (non-dimensional) metric was later introduced in Canadian Gold and Silver Miners Valuation Metrics - update. It is allows comparing miners among one another or over time.
The Valuation spreadsheet is updated on a regular basis. 

While Canadian miners and explorers are active across the globe, you may like to obtain similar valuation information on US, Australian, South African or just about any other miners. I made my first steps in studying valuation data in an article: Gold mining valuation metrics and its limitations focused on the information found at : 24Hgold. That website offers the special feature showing the price of gold and silver in seven different currencies: not a bad thing if you live outside the US.


Updates:
A set of fresh graphs is found on the page 'gold miner pulse' 


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