Wednesday, 31 December 2014

Three year slide for precious metal miners

Buying pressure wanes on broad stock markets, having rallied to new highs only some days after the latest pull-back. Precious metals have been oscillating. On this last full trading day of 2014, gold regained $1200, while silver gained 2.9% to close at $16.27. The Gold to silver ratio still stands at 73.7, barely below its recent multi-year high.
Precious metal miners are polishing their armor: the NYSE Arca gold bugs index (HUI) advanced 4% on Dec 30. (Over five trading days, since Dec 19, there is however a 0.44% decline.)  This most beaten-up market segment (rivaling the oil sector) saw profits dwindle across the board. Well run silver miners even face their revenue declining at an increased output volume. No surprise: while on balance, gold ends 2014 more or less where it started the year, silver (still) faces a stiff 19% decline.
With gold flat, the HUI index nevertheless shed 14.7% over 2014. Relative valuation HUI/Gold made two new absolute lows: 0.1280 on Nov 5 and 0.1269 on Dec 16. Even by the end of the 20 year gold bear market in 2000, the HUI/Gold ratio permanently upheld 0.13. The weekly updates of the gold miner pulse blog page, show fresh graphs on HUI/Gold and SIL/Silver with daily observations over a 6 months time horizon. 
The current article extends to the complete year 2014 and adds the mid term 'retrospective'. Since three years, any miner revival has only been temporary... and was followed by fresh lows during the next leg down. The HUI has slid back to the level of its October 2008 bottom. Speaking about a gold miner bear market has become the most common understatement.

HUI index relative to gold, daily observations over a six months time frame till Dec 30, 2014 (click to enlarge)
Late August metals started weakening with miners initially defying gravity. There was a heavy price to be paid: as the precious metal slump aggravated, miners sold off at an accelerating rate. HUI/Gold plunged below its 50 and 200 days moving average. The December 2013 bottom level was taken out nor much later. It culminated in a precipitous Halloween slide, bottoming on Nov 5, with HUI/Gold falling below its gold bear market bottom (Nov 2000) for the first time ever. The subsequent bounce was short. Early December gold didn't uphold $1200 and sent miners south again. By mid December HUI/Gold slid to a fresh absolute low at 0.1269. Gold recovering from its new post 2009 low causes a relief rally among miners. Confidence remains however very shaky, to say the least. With gold at $1200 on Dec 30, the HUI/Gold relative valuation flags out 2014 at 0.137.

HUI index relative to gold, daily observations year-to-date till Dec 30, 2014 (click to enlarge)
Jan till Aug 2014
Until August, 2014 didn't show too bad. In January we have been climbing out of the trough of December 2013, making a double top. The April-May decline doesn't show too bad on this graph, yet it washed away most of the early 2014 gains. It is illustrative that the 50 dma of HUI/Gold briefly slid below its 200 dma by the end of the April-May decline. During June till August (what is commonly considered to be a seasonally weak 'summer doldrum' period) miners rallied, initially supported by precious metals recovering.

HUI index relative to gold, weekly observations over three years A one and three year moving average are added. (click to enlarge)
Only the continuation of a three year slide
The last graph shows HUI/Gold with weekly observations over a three year time span. Moving averages are 1 year (52 weeks) and 3 years. The three year moving average constantly is above the one year moving average. This illustrates the long term decline. While in the weekly observations since 2012 we may still observe the past recoveries, the graph also illustrates what was meant in the third paragraph: "Since three years, any miner revival has only been temporary... and was followed by fresh lows during the next leg down."


Silver miners

We now move on to silver miners, evaluated using the Global X silver miners ETF (SIL) relative to silver bullion. The introductory paragraphs say a lot: with silver down 19% over 2014 there is little hope for silver miners. 
Silver miner ETF (SIL) relative to silver: daily observations over a 6 month time frame. (click to enlarge)
September and early October bring more hardship instead of an autumn rally. Since mid October the 50 dma slid below the 200 dma, making a technical death cross: the worst was still to come. The Halloween plunge of precious metals drove miner valuations further down, below the December 2013 bottom level. The mid November recovery again proved short lived, with silver unable to uphold even $17 after its rally from the Halloween trough. By mid December the market looked scary towards the end of 2014. The fear of another edition of Christmas shenanigans, with silver futures plunging in thin trading proved overdone. Precious metals have been hovering above their recent lows, however without breaking any conclusive upward resistance levels.

Silver miner ETF (SIL) relative to silver: daily observations year-to date. (click to enlarge)
2014 recovery: Jan to Aug 2014
After some hesitation towards mid January, silver miners steamed up higher, with the relative valuation ratio posting above its 200 dma since Jan 20. Silver not upholding $20 seemed but a minor obstacle early February. Silver miners are determined to curb the downtrend and silver confirming eventually and breaking above $21 on Feb 14 is consolidating the trend. Silver correcting or lagging the gold recovery did not imply a notable downtrend for SIL/Silver. But the mid April slide couldn't go by unnoticed: SIL/Silver corrected below its 50 dma and later even failed upholding the 200 dma. The summer miner recovery brought us back above that level. The early August counter-trend strengthening of silver miners with the metal continuously weakening was not sustainable: the second week of August gravity got the upper hand. Silver miners have been selling off in view of a continuing silver weakness.


Silver miner ETF (SIL) relative to silver: weekly observations over a 3 years. A one and three year moving average are added. (click to enlarge)
Mixed feelings about the longer term trend

The last graph shows HUI/Gold with weekly observations over a three year time span. Moving averages are 1 year (52 weeks) and 3 years. The 3-yma only shows up in April 2013, when SIL quoted for three years. The 1-yma does not follow a steep descending trajectory but oscillates up and down on a more gentle slide. Rallies of SIL/Silver are more vigorous than those of HUI/Gold. Silver miners are somewhat more resilient against the price erosion of the the white metal. The latest slide of the silver price (including a scary over-night plunge below $15) drove SIL/Silver below its December 2013 bottom. However a much lower silver price was required to fulfill this slide: silver is down 19% over 2014. Claiming that "the silver plunge broke the back of the silver mining sector" therefore is far overdone. It is far more probable that previous valuation tops seen in 2014 will come back. What we need for that is silver ultimately starting a recovery from its nearly four year down trend.


Outlook

After a three year slide, gold miners have fallen to a valuation previously considered beyond imagination. Not only has the sentiment towards the sector turned more sour than what it was like in autumn 2008, we are actually back to the valuations only seasoned investors remember from the start of the century, near the end of a twenty year gold bear market.
Going against the trend and painting a rosy perspective sounds foolish and out of place. Yet the circumstances that generally prevail when a turnaround is about are exactly these. What we need are precious metals ultimately recovering from their own continuous downtrend.
Will the past valuations of miners relative to metals return?  I consider that highly unlikely: reckless acquisitions and production expansion investments have caused an impairment among many gold mining majors which is hard to overcome. Yet we don't even need those valuations to return for miners to enjoy a nice rally. Even getting half way up from where we came down from would imply miners to significantly outperform precious metals when these ultimately enjoy their recovery.
 

Further reading

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