Sunday, 25 March 2018

What may spark the next miner rally?

Miners lagging the metals has been an understatement.
Even during last week, with gold up over 2.5% on balance, closing at $1346.8 the miner response was quite meek.  The HUI gold miners index added 3.33%; admittedly more, yet little convincing.

Wait for the next 1% gold slide and you'll see last week's advance vaporize instantaneously. Year-to-date the yellow metal added 3.4% whereas the HUI gold miners index shed slightly more than 8%. If you need more evidence just read last month's posting: Gold miners persistently lagging the metal

What may spark the next miner rally?

Recycling of the dollars after two take-overs in the gold miner space are likely to drive up gold stock prices (Frank Holmes sticks by $1500 gold call for year end)

E.B. Tucker : You Want a Gold Rally? You're Going to Get It - Doug Casey Editor
For gold investors patiently awaiting a gold rally, Doug Casey’s right-hand man says the time has come. “This is exactly the time, that something unrelated sets off a gold rally. The charts say it’s time and the gold/silver ratio says its time, but it’s not going to come from where you think, it’s going to come from left-field,” said E.B. Tucker, editor of The Casey Report, and independent director of Metalla Royalty & Streaming Ltd. (MTA). The gold/silver ratio was designed at 15-1 but has continued to balloon over the years, getting as high as almost 90-1. In 2011, the ratio was 40-1 and has slowly widened back to 80-1. For Tucker, this ratio is a key indicator, noting it has only reached these levels four times in the last 20 years. “It is the number one indicator that we watch when we are looking at putting money to work in the space – the last time it happened, the HUI went on a tremendous run 150-200% – this indicator has been full proof the last 20 years,” he explained. Tucker added that he especially likes stocks that have been down on their luck, noting Coeur Mining (CDE) and First Majestic (AG) as his picks. “I’m going to tell you something shocking, When you see a big move in the sector, the stocks that have been the dogs actually move more than the stocks that have been really good,” he said.

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A foolish consistency is the hobgoblin of little minds. (Explanation: A great person does not have to think consistently from one day to the next. This remark comes from the essay “ Self-Reliance ” by Ralph Waldo Emerson.)

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After the above, I can safely add my own grain of salt to the discussion.
  • "Gold rises whenever the real interest rate is negative"
  • "Gold is inversely correlated to the USD"
There is some truth in both. Recent gold strength is in USD mainly. Gold reluctantly strengthens in other currencies.  Kitco provides a graph with gold priced against the USD-index. The last 12 months look like this:

Gold priced in USD (red) or currency neutral (KGX) (blue)

The currency neutral gold price chart isn't very convincing lately. It may help explain why miners aren't favorably responding to gold keeping above $1300.

The 'negative real interest rate' part explains a lot of the gold price rally of the late 1970's. Despite higher interest rates, inflation sparked leading to negative real interest rates and a rapidly rising gold price. Apparently the 'negative real interest rate' is what drives US demand and through this the USD denominated gold price.

Yet 'negative real interest rates' are equally currency dependent. Short term interest rates have been negative in euro for over two years now.  This didn't prevent the currency to start appreciating against the USD and the euro denominated gold price to move sideways.

As soon as we witness the KGX gold price catch up, miners may start responding more favorably. As for now, most miners see their turnover flatline and don't benefit from any margin increase, as their costs also are denominated in foreign currency.

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