Sunday, 13 January 2013

Miners relative to precious metal prices - an update

The focus of this blog 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.
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.

During 2011 and even over the long haul, the relative performance of mining majors to the precious metals they produce had been disappointing, both for major gold and for silver miners. The present blog article is monitoring whether the trends observed have persisted throughout 2012. Therefore the graphs posted here are showing daily observations with a 13 months time horizon. It complements the blog page gold miner pulse, which provides regular updates with a 6 month time window.

Unhedged Gold miners relative to Gold bullion 

The HUI has been sliding relative to gold for most of the winter and spring of 2012 as gold was sliding into the mid May abyss. The February 2012 gold rally didn't really bring about a turn around. HUI/Gold slid for most of January, despite the metal firming on balance. The short lived gold rally only managed to make HUI/Gold spike briefly end February before its tailspin.
After making a double bottom end July, HUI/Gold had improved to above 0.29 till October. Yet As shown on many occasions, it may slide back on any minor hesitation in precious metal markets, especially if the broad stock market is selling off. Between Friday Sep 14 and end October, HUI/Gold kept above its 200 dma. The 50 dma of HUI/Gold crossed above the 200 dma, which I thought was drawing the curtain on a dramatic two year period of gold miners underperforming bullion. By mid November, we brutally broke those supports, bringing extreme miner weakness back in focus, despite $1700 gold ($1663 by Friday, Jan 11). HUI/Gold ends 2012 considerably lower than where it has started the year. Gold firming about 6% over the year translated into miners losing ground.

Unhedged Gold Miners index HUI relative to gold bullion (spot market). Daily observations covering all of 2012 (from Dec 12 2011 to Jan 11, 2013) - click to enlarge
Weakness of miners relative to gold isn't new: The 2012 graph should be viewed in a longer perspective. Therefore I include a graph over 3 years with weekly observations.

Unhedged Gold Miners index HUI relative to gold bullion (spot market). Weekly observations covering  early Jan 2010 to early Jan 2013 - click to enlarge - The red and blue graphs show 50 week and 200 week averages.
After the 2009 recovery, HUI/Gold flattens out at around 0.40 (before 2008, we used to average 0.5). The decline starts in May 2011 and the August/September gold rally to its all time high that year doesn't provide any support.

The HUI index has been calculated since 1996. A very long term HUI/Gold ratio graph is shown in "Miners relative to precious metals: a tactical approach" (July 2 posting).

Global X Silver Miners ETF (SIL) relative to silver bullion
The summer slump of precious metals left little of the nacent recovery after the mid May bottom. In August some improvement was looming, yet SIL/Silver has been dropping back below its 200 dma until QE3 perspectives launched a vigorous rally on precious metal markets. The recent sell-off on the broad stock market has dragged silver miners along, despite the metals rallying after Obama's reelection. It brings extreme miner weakness back in focus. In view of the recent precious metal sell-off, silver miners have shown resilience, giving way less than the metal has.

Silver miners are observed through the GlobalX ETF : SIL. Daily observations of SIL/Silver bullion from Dec 12 of 2011 till Jan 11, 2013 - click to enlarge
It's again useful to view this graph in a longer time perspective with weekly observations over nearly 3 year. The SIL Etf is around since little less than 3 years. The situation is less cumbersome than that of the gold miners. Though 2011 started with a slide, with silver miners weakening as the white metal rallied to its late April high approaching $50/oz, the SIL/silver graph has been bouncing up and down later on.

Silver miners are observed through the GlobalX ETF : SIL. Weekly observations of SIL/Silver bullion. Data from early May 2010 to early Jan 2013 - click to enlarge. The blue graph shows 50 week averages.

Canadian Gold and Silver Mining indices
How gold miners are performing is shown by the capitalisation weighted gold miners index of stocks included in the Gold Miner Pulse database (yellow diamond symbols). Note that all quotes are in CAD, which has been fluctuating to the USD. The silver miners index (blue square symbols) was best on its way to gain back its initial level, which we've last seen briefly end February 2012.

Gold Miners index, Silver miners index and Equal Weight Index, base Nov 19, 2010 - Updated of: Jan 11, 2013 - 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. The equal weight index used to correlate well with the silver miners index: in comparison to the gold mining bellwethers, silver miners are mid caps or small caps.
Since recovering from the July secondary low, silver miners have been outperforming gold miners, with the junior tilted equal weight index mimicking gold miners rather than silver miners (as it used to before).

Performance list
There is an important disparity among the gold and silver miners of the GMP database. Few lucky picks have been outperforming silver or gold by a decent margin. Too many laggards seem moribund. Only 25 of the miners are above their Nov 19, 2010 mark. The median miner (in the middle, with an equal number better and worse) loses 41%.

Gold Miners index, Silver miners index and Equal Weight Index , base Nov 19, 2010 - Update of : Jan 11, 2013. click to enlarge
Three miners/explorers lose 90% or more:
  1. Crazy Horse Resources Inc.
  2. AM Gold Inc.
  3. Kiska Metals Corporation
Note that Great Basin Gold has been dropped from the GoldMinerPulse list.

At the right hand side Silver Crest, Pretivm Res. and Wildcat Silver have doubled; outperformed only by NGEx Resources and Rio Alto which are still off scale.

A more detailed analysis including list composition changes, are found on the page "miners news". 

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.
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.

The present blog is an update of the more detailed article, published on July 2, 2012: Miners relative to precious metals: a tactical approach.

Further reading

Several more articles, using this same approach, have been published:

Returning even further into the 20th century is possible. The Philadelphia gold and silver miners index (XAU) goes back to December 1983 and Barron's gold miners index beats all, with data going back to before WW-II. For such very long time range articles I refer to: Gold miners: three decades for naught (Jan 2015) or Decades of underperformance (Feb 2011).


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