Sunday, 29 October 2017

Persistently lagging the metals

The last downturn of gold and silver brought the yellow metal to a Thursday close of $1266.2 to end the week at 1273.2, easing barely 0.53% over the week. However the HUI plunged 5.31% leveraging gold down tenfold. Miners have been persistently lagging the metals for most of 2017. 

Whatever well paid perma-bulls may want you to think, the gold mining sector is not the place to be. It can reward you during the short stretches up, but you may end up penniless over the long haul. Not surprisingly the HUI/Gold ratio dropped to a year-to-date low on Thursday to end only marginally higher at 0.1471 on Friday Oct 27.

The gold miner pulse page tells you all in a few graphs. Extending the six months focus of HUI/Gold to a year-to-date perspective, the below graph illustrates well the progressive deterioration of the gold mining sector.  Though gold ($1151/Oz) was way below the current level as trading started on Jan 3, HUI/Gold posted at 0.164. Even in absolute index points HUI closed at 189.9 on the first trading day of 2017. Meanwhile it is down to 187, with the yellow metal up well over $100 for the year.

HUI to Gold ratio, daily observations year-to-date

The Miners performance page also was updated, with a glance on the slide of the last few weeks and the (quite cumbersome) individual performance of most miners and explorers over the long haul.

Mining ETFs were off only marginally better than the HUI, with weekly declines between 2.84% and 4.49%. Poor comfort: with a 2.44% decline our contributor driven Explorer and Junior Miners spreadsheet is off somewhat less bad. We had declines outnumbering advances 10 to 3 on the list, with Liberty gold flat for the week. With a slide in excess of 8%, Almaden Minerals and Eurasian Min. were the major drags on the list. Tiny advances for Osisko Royalties, Sandstorm and Pretium were unable to curb the trend.

HUI - Gold synoptic view

Similar to the linear regression between the HUI and Gold over the long haul, we repeat this procedure for the year 2017.  Gold persistently lagging the metals as claimed in the title would imply that the linear regression fails over the short time stretch. You can check in the below graph:

Gold ( red graph, left scale) and HUI (blue graph, right scale) since Dec 15, 2016

Parameters for the short term linear regression are calculated using 2017 data only. 

The regression line responds to HUI = 0.466 * ($Gold - $827)

However at 0.29 the regression coefficient is extremely poor.  Not surprisingly: The gold price trends upward over the year, yet the HUI gold miners index is moving sideways. No regression-line can reliably reflect such non-linear event. Both graphs are starting on Dec 15, 2016. Gold bottomed on that day. The yellow metal had been selling off after peaking above $1360 in July. 

The present situation reflects that of 2011 when gold miners failed to catch up with the gold price as it accelerated to the August all time high.  We need to carefully monitor the regression relationship in order to confirm that it indeed breaks down or shifts to different parameter values, thereby invalidating the relationship that guided us throughout the gold bear market and the 2016 boom/bust cycle.

Mid term view

Table 1: Gold and the HUI on Nov 17, 2017 and where they are compared to their bear market lows and 2016 rally highs.

 nov 17
Up from low
Down from High

Gold and the HUI recovered about as well from their bear market low (mid Dec 2015 for gold and about a month later for the HUI).  However gold currently is down only 5.3% since its 2016 summer rally high, whereas the HUI shed over a third.  Highs and lows are closing values, no intraday peaks or plunges.

What is at hand in gold mining ?

As a result of the gold mining bear market, gold producers were forced to downgrade some of their reserves to the 'measured and indicated resources category'.  Those resources can no longer be mined at the current gold price.  As richer or more easily accessible ore layers are being depleted first, miners are more rapidly exhausting their high margin deposits.
This policy is well known as 'high grading'.  It may allow miners to bridge short periods of subdued gold prices, however at the cost of hampering future profitability.
The first consequence is gold output declining and miners missing at the top-line when the gold price assumes its uptrend.  There is no easy way out: buying high margin resources and building a new mine usually dilutes share holders.  Converting measured and indicated resources back to proven and probable reserves is another option. This requires new investments in mine construction or extension. It allows expanding production without prior acquisitions, however at higher all-in sustaining costs:  yet another challenge for profitability.

Prior articles on this topic:

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