Wednesday 12 February 2014

Miners rally into second gear

The worst asset class of 2013 has metamorphosed into the high flyer of the first months of 2014. After a few weeks of hesitation, the gold miners rally gets into second gear. When evaluating miners relative to precious metals, the paradigm change is revealing itself. Throughout nearly the complete gold miner bear market, the main index for unhedged miners quoting on American exchanges (HUI) was losing ground relative to gold. Moreover it rarely even regained its declining 200 days moving average. The trend reversed and HUI/Gold now breaks above its 200 dma.

Unhedged Gold miners relative to Gold bullion
Despite unsteady precious metal price trends, miners keep relatively strong. At 0.182, HUI/Gold now breaks above its 200 days moving average for the first time since October 2012. HUI/Gold has been well above its decade low, reached only two months ago. After regaining the still declining 50 dma, HUI/Gold was unable to extend its progress for a while. On Thursday Feb 6, HUI/gold even slid below 0.17, raising doubt on the recovery, but Friday made our week. Now gains are extending: the miners rally gets into second gear.

Unhedged Gold Miners index HUI relative to gold bullion (spot market). Daily observations over six months. Last update Feb 11 - click to enlarge
Previous action
Plunging to 0.157 on Thursday, Dec 5, HUI/Gold has set a fresh low for two weeks in a row. The latest gold plunge to about $1180 on Thursday Dec 19 upon the final tapering announcement, may have been the grand final of this 2013 gold bear market. For miners: if late June felt like utter despair, December rather was something like total destruction.

How we got there:
After the April 15 downbeat, the timid recovery of the beaten down gold price couldn't inspire miners, with mining indices continuing to give way. It took mining investors two more days to finally realize gold was crawling back on its feet. On April 17, HUI/Gold dipped to 0.187, which is well below the 2008 crisis bottom level. The precipitous slide of precious metals has wrecked havoc among miners. The 'Unhedged gold miners index', HUI, dipped to 257 and the Philadelphia Gold&Silver miners index, XAU, broke below 100.
After brutally sliding back when the short lived July gold recovery came to an end, HUI/Gold was challenging its previous low. The rejuvenated bullion recovery shortly brought HUI/gold back above 0.200 during the third week of August. The FED postponing the tapering of QE3/4, the government shutdown & the debt ceiling debate have not enforced any recovery. On the contrary: after sliding almost unabatedly since end August a new HUI/Gold low of 0.166 on Tuesday Oct 8 was reached. After HUI/Gold had bounced off that low, it however failed to even uphold the declining the 50 dma.

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, 2012 posting). You find a recent posting with data over a 6 years time span until Jan 2014 in previous posting: HUI mining index relative to gold.

Global X Silver Miners ETF (SIL) relative to silver bullion

Last recovery of SIL relative to silver set in before the end of 2013. After some hesitation towards mid January, silver miners steam up higher, with the relative valuation ratio posting above its 200 dma since Jan 20. Silver not upholding $20 seemed but a minor obstacle last week. Silver miners are curbing the downtrend with some determination.

Silver miners are observed through the GlobalX ETF : SIL. Daily observations of SIL/Silver bullion. Last update Feb 11 - click to enlarge
How we got there:
"Silver miners upholding better than gold miners" ought to be reformulated: "The slide of silver miners is more often interrupted by a false recovery than that of gold miners on their seemingly fatal slide to perdition." Extreme losses of silver with wild intraday swings causes the SIL/Silver ratio to behave erratically. Yet we don't observe the same systematic downtrend observed for gold miners.

First leg down and recovery
Mid April 2013 relative valuation slid dramatically, but then again was recovering more quickly than did the HUI/Gold. With silver plunging after failing to recover properly, silver miners seemed losing their edge. Yet it appears they show resilience: SIL/Silver briefly quoted above its 200 dma, yet slid back below its 50 dma as the short lived July recovery failed. With silver finally breaking above $20 the second week of August, SIL/Silver recovered.
Second leg down
Despite silver having surged well above $24 by August 23, miners couldn't catch up. The ratio further slid back after silver corrected. The 50 dma crossing above the 200 dma was expected to provide some support. However that was short lived: early October 2013, the 50 dma slid below the 200 dma and made another dead cross almost right at the market bottom. By mid November, a temporary recovery brought the SIL/Silver ratio back up to the 50 dma; yet only to slide back almost unabatedly about two weeks: silver miners have been experiencing difficult times ... Early December silver miners were again narrowing the gap with the 50 dma, after decent Q3 results by Pan American Silver. The new silver slide below $20/Oz completely has undone the nascent silver miner recovery. SIL/Silver was ending 2013 hovering above its historic minimum.

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. By end 2012, before the leg down set in, the silver miners index (blue square symbols) was best on its way to gaining back its initial level. Even now, silver miners are shrugging off the still poor ($20.25) silver prices.

Gold Miners index, Silver miners index and Equal Weight Index, base Nov 19, 2010 - Last updated on: Feb 11, click to enlarge
The third index added is an equally weighted index of all (silver and gold) miners from the GMP database. Because of its simple weighing 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 2012 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). Juniors and explorers are recovering some of their losses relative to the gold mining majors.
How we got so deep into trouble is best illustrated when showing a long term graph of those capitalisation weighed miners indices. It also puts both the shortlived August 2013 and the current miner revival in perspective.

Long term graph of the GMP list based (and capitalisation weighed) gold (black), silver (blue) and equal weight (red) miners indices. Reference 1000 on Nov 19, 2010. - Data till Jan 24, 2014 (click to enlarge)
The silver miners index rose till 1400 in April 2011, peaking three weeks earlier than did the silver price. After bottoming on June 26, the gold miners index had recovered, yet in December 2013 was back down again threatening to take out the June low. The junior miners index effectively made another low in December.

Performance list
There is an important performance disparity among the gold and silver miners of the GMP database. Too many laggards seem moribund. The median (or middle) miner (with an equal number better and worse) is losing 66.7 %. We still need a triple to break even.

Performance disparity graph of all miners and explorers on the GMP list, base Nov 19, 2010 - Last updated on: Feb 11, click to enlarge

There (still) are14 miners/explorers losing 90% or more, with 4 thereof down over 95%. The 3 worst:
  1. Telson Resources
  2. Aura Minerals
  3. Golden Minerals
At the right hand side you now find 11 miners quoting above their Nov 2010 mark, lead by Tahoe Resources, posting a 142% gain. Yamana gold is the first major gold miner close to breaking even.

A more detailed analysis including list composition changes, is found on the page "miners performance". The miners included in the database are classified in five performance quintiles. This allows evaluating how individual miners went down with the herd... or withstood the tempest and are among the first emerging.

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