Saturday, 6 August 2016

Gold miner impulse phase

Over half a year has lapsed since Gold and Silver miners bottomed on Jan 19. Time to make an evaluation of the first half year of a rejuvenated precious metals bull market and the impulse phase on precious metal miners.

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. 
Special attention is paid to the miners covered by the database 'Canadian gold and silver mining', for which a capitalization 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.

Several more detailed articles focusing on the longer term have been published. These are using the same approach as this blog page and still are a good read to grasp the historic perspective:
  1. Miners relative to precious metals: a tactical approach; (July 2, 2012)
  2. Miners relative to precious metals: An update on 2012;  (Jan 13, 2013)
  3. Anatomy of a gold miner bear market (Dec 30, 2013)
  4. Three year slide of precious metal miners (Dec 31, 2014)
  5. Gold miner bear market starting its fifth year (Jan 3, 2016)
During 2011-13 and even over the long haul, the relative performance of mining majors to the precious metals they produce had been disappointing for major gold miners, even while the metals were in a solid uptrend.  See: Gold miners: three decades for naught or Decades of underperformance

These blog articles had a time perspective covering years or decades, the present article is more short term oriented. It is monitoring whether the recovery trend is persisting. Therefore the graphs posted here are showing daily observations year to date. Most graphs are reflect the situation on July 29. 

Unhedged Gold miners relative to Gold bullion

For much of June, metals and miners were grinding lower, but the Brexit vote on June 23 caught many short speculators wrong footed. Gold rallied and the HUI/Gold strengthened. Summer doldrums seem restricted to a two week shallow pull-back. Last week precious metals regain strength and miners rally correspondingly.

The HUI/Gold ratio continued strengthening with only minor pull-backs throughout the entire first half year of the new miner bull market. This indicates miners outperforming the metals, which is typical for the first impulse phase of the miner recovery. Since gold miners slid to share price levels beneath those of the worst nightmares of long term mining investors, the initial recovery with the HUI index doubling has been swift. Higher gold prices are oxygen to a mining sector which had been operating near AISC (all-inclusive sustaining costs).  The slope of the HUI/Gold curve tends to flatten, which also reflects gold now staying in a trading range between $1315 and $1375.

Unhedged Gold Miners index HUI relative to gold bullion (spot market). Daily observations year-to-date. - click to enlarge
How we got there:
From May 2015 till early August, the HUI/Gold ratio had been grinding lower for 14 consecutive weeks. The gold recovery till Aug 20 lifted HUI/Gold off its lows. Despite a mild gold pull back precious metal miners plunged, taking the lead in the stock market recession. The late August optimism was another bull trap, both stock markets and precious metals were weaker which sent miners south again, with HUI/Gold back below 0.100, at its all-time low. Failing recoveries alternate with swoons, setting a multiple bottom formation. In October, gold market strength started translating into miner strength, but the recovery still was frail. Gold plunged to a fresh post-2011 low on Nov 27, after its recovery attempt faltered well below $1100, HUI/Gold initially upheld, but the mid Dec gold slide was the step too far. The brief recovery attempt of HUI/Gold before Xmas didn't get legs, but the set-back before new year also proved temporary.


Gold was progressing till Thursday Jan 7, with miners responding favorably. Yet the combined down draft of precious metals weakening and stock markets sliding caused a sell-off, quickly eroding the early 2016 gains: the HUI bottomed at 100.7 on Jan 19, 2016, a 14 year low! The reversal after Jan 20 proved consistent and after the roller coaster ride the HUI index ends January with an 8.6% advance. The first two weeks of February added a stunning 35.4%. The HUI/gold ratio broke above both its 50 dma and its declining 200 dma over a 2 weeks span. It made a 'golden cross' on leap day, with the 50 dma surpassing the 200 dma. The long standing decline of the 200 dma of HUI/Gold finally is curbed since end March, After choppy trading early May, precious metals kept grinding lower. Poor US employment data on Friday June 3 made the greenback tank. Meanwhile precious metals made a U turn up with miners rallying and the HUI/Gold ratio strengthening.

Note: The latest updated long term graphs of HUI/Gold can be found at Miners relative to gold: Long term charts on the HUI indexDuring the gold ascent to its all time high above $1900 in Aug/Sep 2011, the HUI was lagging gold; thereafter fresh lows were set after any gold recovery failed.  Recently the bear market logic: a non-proportional relationship between HUI and Gold has been described, which makes HUI/Gold (or for that purpose Gold/XAU) a less significant valuation parameter. The HUI index has been calculated since 1996.

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

The Brexit vote proved to be a game changer, with the 'white precious metals' catching up with gold. Closing at $20.29, silver is regaining its record level put down early July.

Silver miners are observed through the GlobalX ETF : SIL. Daily observations of SIL/Silver bullion year-to-dateclick to enlarge
NOTE: In 2015, there has been a 3:1 consolidation (or reverse split) on SIL. Historic values in this graph have been changed accordingly.

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 recovery than that of gold miners on their seemingly fatal path to perdition."

SIL/Silver flagged out 2014 at 1.68. As with HUI/Gold, 2015 started with silver miners outperforming the white metal. SIL/Silver was approaching the top level of the late November bounce. But silver has some work to do, after sliding 20% over 2014, where gold almost held ground. Silver miners did not share the wakening enthusiasm gold miners have enjoyed. SIL/Silver first kept flirting with its 50 dma level and then broke down, having dropped below its mid December '14 bottom. Silver has been quoting at a critical level, with most miners producing below the all-in sustaining costs.

Unlike the Jan 2015 recovery for gold miners, that of silver miners has been half-hearted, with SIL/Silver during the subsequent March miner slump digging to a yet a lower minimum. Silver unable to make any meaningful recovery from its post 2009 minimum is the main culprit. 
After the brutal slide mid July, the SIL/Silver ratio slid below 1.32 from 1.63 early July, with fresh absolute lows on a weekly basis. While the white metal slid below $14, to a new post 2009 low, SIL/Silver finally gave way after mid Dec 2015 and slid to 1.339 below its 50dma and into bearish territory. The brief recovery attempt before Xmas was temporary.


Silver started 2016 off its 6 years low, but with precious metals retreating from the second week of January onward and broad stock markets plunging, SIL/Silver abruptly slid far beneath its 50 dma. Silver bottomed in January, about a month later than gold did. It's little surprising that silver miner strength initially was lagging that of gold.

The current recovery seems sustainable while silver prices hold above $15/Oz, a break-even price for many primary silver miners. The SIL/Silver ratio broke above its 50 dma and wiped away its early 2016 losses. The mid October recovery maximum was broken before mid February. The 50 dma started turning up and we made the golden cross during the short trading week before Easter.

Canadian Gold and Silver Mining indices
How gold miners are performing is shown by the capitalization weighed gold miners index of stocks included in the Gold Miner Pulse database (yellow diamond symbols). Note that most quotes are in CAD, which has been fluctuating to the USD. The long term depreciation of the loonie mitigated the miner loss during gold miner bear market. The recovery of the CAD since January also subdues the recent miner rally gains. By end 2012, before the bear market aggravated, the silver miners index (blue square symbols) was best on its way to gaining back its initial level. By mid Jan 2016, silver miners had lost much of their edge relative to gold miners. The white metal kept weakening relative to gold. Though the silver miner recovery was hesitating at first, by now silver miners have outperformed gold miners. Silver miners were the first to cut their accumulated decline to less than 40%. Last week miners corrected towards their mid April level. Yet after a poor job growth figure, a FED rate rise seems far away. On June 3, the green back tanked which sent miners rallying. Precious metals kept grinding lower during much of June, but the Brexit spurred an new gold rally.

Gold Miners index, Silver miners index and Equal Weight Index, base Nov 19, 2010, 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 have been 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 capitalization weighed miners indices. It also puts both the short-lived August 2013 and past March and June 2014 and Jan 2015 miner revivals in perspective. 
The current revival since late Jan 2016 heals the major leg down of the miner bear market: we have topped the May 2013-Oct 2014 trading range.

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 Aug 5, 2016 (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, 2013, the gold miners index had recovered, yet in December 2013 was back down again threatening to take out the June low. The equal weight (junior dominated) miners index effectively made another low in December. 
The silver miners index posted a higher maximum during both the March 2014 and June to early August recovery than it did in the August 2013 recovery. The gold miners index and the equal weight index did not peak higher at any of the failing 2014-15 recoveries than they did in August 2013.

Performance graph
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 48.3%: a double is needed to break even. The average loss posts at 25.6% as the distribution is slanted towards the high gains.
GMP Miners sorted by loss to gain since inception on Nov 19, 2010. Click to enlarge
The recovery resumes after a short summer pull back. Nevertheless, there still are 16 miners/explorers losing 90% or more, with 6 thereof down over 95%.  By now 22 miners (including the entire top quintile) are quoting above their Nov 2010 mark, led by Arizona Mining; 9 stocks have doubled. The top 3: Arizona Mining, Osisko Mining (ex-Oban) and Fortuna Silver are omitted in the above graph to avoid scale expansion, but you find the top 12 in detail below:

Top 12 miners of the GMP list on a logarithmic scale from 10% till 1000% gains
In the lower decade, minor gradations are 10% apart; in the upper decade they are 100% apart.
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.

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