Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Gold vs Gold Stocks: Bullish Anomaly Developing?

Commodities / Gold and Silver Stocks 2015 Feb 27, 2015 - 09:08 AM GMT

By: Jason_Hamlin

Commodities

Over the past few months, mining stocks have returned to offering excellent leverage to the advance in prices for precious metals. Yet, during the recent pullback, the downside leverage has been absent. This is atypical behavior as mining stocks usually lead the metals and generate leveraged gains (or losses). This could be a bullish development, suggesting that investors in mining stocks believe they have the seen the bottom and are unwilling to sell despite the recent dip in gold prices.  


Precious metals had a powerful start to the year, with gold climbing over $100 and silver rocketing roughly $3 higher during the first three weeks of January.  But the rally has since faded with both metals giving back nearly all of their 2015 gains.

Mining stocks typically offer leverage to the movement in the gold or silver price. From the start of 2002 until the end of 2007, gold went up roughly 203%. During the same time period, the HUI index of mining stocks rocketed 547% higher.  That is leverage of roughly 2.7 times. You will notice that the leverage cuts both ways, as gold dropped 41% from the high mark on 9/06/11 until the 11/06/14 low, while mining stocks (HUI) fell by 77%. The leverage to the downside was 1.8x.

Anomalies pop up such as the period from 2008 to the end of last year. During this time period mining stocks were down 60%, despite gold being up 44%. So the positive correlation and leveraged gains are not consistent, which I will discuss more later in this article.

During the latest rally from mid-December 2014 to mid-January 2015, the leveraged gains that investors grew accustomed to during the early phases of the gold bull market returned. Gold advanced by 12% from the mid-December low to the mid-January peak. During the same time period, gold stocks advanced by a massive 37%, generating leverage of 3.1 times the advance in the gold price!

The really interesting aspect of the latest advance and pullback is that gold stocks have not registered a leveraged decline this time around. From the peak on 1/20/15 to 2/26/15, gold stocks declined by the exact same amount as gold, -8%. Investors were able to capture 3.1x leverage to the upside, without being penalized by that same leverage to the downside. This has resulted in a total gain of 26% for gold stocks since the 12/2o/14 low, despite the fact that gold is only up 3%. The leverage is an astounding 8.7 times over the last two months!

The miners are not following the metals lower and this is a significant development, as mining stocks typically lead the metals (either higher or lower). Investors are not convinced that the pullback in gold and silver will last and continue to view mining stocks as undervalued. This could indicate that we are about to see a bounce in precious metals in the near term and that edging into new positions could be warranted.

While we advocate holding physical metals in your possession first and foremost, the leverage mentioned above is why we believe that mining stocks will offer better returns going forwards.

While the leverage cuts both ways, it has not been as severe to the downside as of late. From the top in September of 2011 until the low during November of 2014, gold dropped by 44% and gold stocks (HUI) fell by 77%. The decline in gold stocks was 1.8 times as severe as the drop in the gold price.

This leverage occurs because a small change in the gold price translates into a huge change to the profit margin of a mining company. For example, if a mining company has all-in costs of $1,000 and sells the gold for $1,200, they have a profit margin of $200 per ounce. If the gold price goes up by $200 to $1,400, they now have a margin of $400. While the gold price increased by just 16%, their profit margin doubled (+100%).

However, mining stocks don’t always offer such leverage. During periods when costs are climbing rapidly, particularly energy, labor, and borrowing costs, the leverage declines. When investors lose their risk tolerance or trust in the markets, they will favor metals over mining stocks. This occurred around the time of the 2008 financial crisis and ensuring years, when investors favored the metals over the miners.

So then, how can we determine if we entering a period when mining stocks are going to outperform gold? When will mining stocks generate positive leverage to the advance in the gold price?

The HUI/Gold ratio can lend insight. When the ratio is below the gold line, I expect gold stocks to outperform the metals (to the upside or downside). When the ratio is above the gold line, I expect gold stocks to underperform the metal and gold to outperform. At the current ratio of 0.16, gold stocks are near the most undervalued they have been since the start of the bull market back in 2001. There has been a nice bounce in the past few months, but the ratio still needs to double to reach equilibrium. The bottom line is that mining stocks remain oversold and undervalued relative to the metals that they produce and this suggests leveraged gains in the near future.

Like most indicators, the HUI/Gold ratio is not perfect. But it is one of the many tools that we use to determine the investment strategies outlined in the Gold Stock Bull Contrarian Report (50% off special for new members: $47 for a 3-month trial with coupon code TRY47).

Of course, not all mining companies are created equally and we always aim to outperform the HUI. When analyzing which mining stocks to buy, we look for companies that have high grade mines with low costs, a high growth profile, experienced management, low political risk, mining-friendly governments/tax incentives, blue-sky pipeline projects, the ability to secure financing at favorable terms, high insider ownership and projects that are attractive takeover targets for the majors.

You can perform all of this research yourself or let us do it for you at a minimal cost. Our current ‘50% off’ special allows new members to try out the service for three months at just $47, instead of the normal $95 quarterly rate. Best of all, you can try it out 100% risk-free for 30 days. If you aren’t 100% satisfied, we will give you a full refund. Click here to get started now!

By Jason Hamlin

http://www.goldstockbull.com/

Jason Hamlin is the founder of Gold Stock Bull and publishes a monthly contrarian newsletter that contains in-depth research into the markets with a focus on finding undervalued gold and silver mining companies. The Premium Membership includes the newsletter, real-time access to the model portfolio and email trade alerts whenever Jason is buying or selling. Click here for instant access!

Copyright © 2015 Gold Stock Bull - All Rights Reserved

All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The information on this site has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any information on this site without obtaining specific advice from their financial advisor. Past performance is no guarantee of future results.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules