Oversold miners; Lagging gold

The yellow metal peaked in August 2020 at an all time high, with miners following in the slip stream. While little over one year later, gold is less than 15% off its peak, miners are oversold and lagging gold.

Trend challenges

Last April, the regression trend between the HUI miners index and gold was confirmed as miners regained the regression line and residuals turned positive. However the relief proved to be short lived. Since mid June residuals have not only been permanently negative, but they nearly slid to the level briefly experienced during the March 2020 Corona sell-off. There is however one important difference: the Corona plunge was a shake-up with the trend reversing immediately after. The current grinding lower of miners and further lagging gold reminds a systemic breakdown.

Synoptic view

In the 'synoptic view' graph, the HUI/Gold regression has been implicitly made use of. The red graph both represents the gold price, when read on the left axis, and the regression value of the HUI miners index, when read on the right axis. The blue graph provides the true HUI values, which should fluctuate around the regression values for the regression to hold.

Synoptic view of Gold (red graph) on the left axis and the HUI (blue graph, read on the right axis) - click to enlarge to full scale

As the true dimensions of the Corona outbreak had become obvious, a first digression suddenly emerged, with miners plunging deep, while the gold correction was more shallow and temporary. 

The digression early 2021 has been smeared out over time, but manifested itself with miners ignoring gold strength during February and subsequently succumbing feverishly to a double dip gold correction in March. Subsequently miners briefly regained their regression value. By mid June the situation suddenly deteriorates as the gold recovery fails at $1900/Oz. Miners brutally sell off and plunge far beneath their 'expected regression value'. The discrepancy briefly is reduced after the overnight Aug 9 gold plunge beneath $1700/Oz is met with disbelief. But the gold market normalizing brings no relief for the miners. On the contrary: residuals plunge to a level not seen since the Corona sell-off.

Regression residuals

The differences between the real HUI observations and the regression values are called residuals. When plotting those residuals over the last year, we get an excellent idea of when the statistical regression is under stress.

Regression residuals since June 2020

Regression residuals remaining deeply negative imply a severe strain on the credibility and ultimately the validity of the regression relationship. In the first article on the new regression line between the HUI and Gold, previously existing regressions have been detailed.

All previous regressions have been invalidated in the same way: miners dropped below the regression line and didn't recover, grinding ever lower or moving sideways with an uptrend in the yellow metal. The current downturn of miners with gold still holding around $1800 makes all orange warning lights flash.

Discussion

Plenty of 'explanations' can be brought forward of why this regression relationship is under strain or about to fail.

• Despite higher and more persistent inflation in the US, gold doesn't rally, which makes mining investors wary. As their investment rationale is invalidated they sell.
• The recovery of crypto-currencies (above all Bitcoin and Etherium) draws a lot of capital in those emerging asset classes. It has been repeatedly claimed that 'Bitcoin stole gold's thunder'.
• Despite over-extended valuations, US stock markets indexes keep grinding higher. The insurance gold can offer in adverse times seems little compelling.

To the above, I may add that persistent inflation tends to raise mining costs, which offsets part of the margin gain miners have enjoyed over the past year. Once more stock price expectations for miners are under pressure with precious metals kept constant. 

Many different arguments have been invoked for all of the past regression breakdowns. Some of them were less off track than others. With the benefit of hindsight we will probably know in the not too distant future why miners once more are lagging precious metals.

Hui - Gold Regression trend

Regression trends can be derived by plotting (HUI, Gold) couples on a graph. 'Time' is thereby eliminated. As shown in the below graph, a regression is a statistical tendency lasting over a medium to longer time frame. It is not a mathematical axiom or physical law carved in stone. 

HUI - Gold regression lines

The top line shows the regression relationship that was valid between summer 2012 and autumn 2017. It guided us through the gold bear market and the 2016 boom/bust cycle only to give way later on as miners were unable to match any timid gold recovery. Systematic and increasing negative residuals eventually invalidate a regression trend.

The current regression line 'predicts' much lower HUI index values for any given gold price than the former regression did. This should remind mining investors that 'leverage to the gold price' (often called 'optionality') generally holds over a short to medium time frame, but definitely not over decades.

The main difference since last graph is a second 'belly' forming underneath the regression line at around $1800 gold. Monitoring the aggregate miner performance remains necessary to figure out where this situation is leading to.

"Miners lagging gold over the very long term" has been discussed in detail in the latter sections of the April article: Gold miners regain their regression trend line.  It seemed to be more ominous than ever.