Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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