Will Gold Mining Stocks
Drop Any Further?
By Przemyslaw Radomski, CFA
Based on the June 26th, 2013 Premium Update.
Visit our archives for more
gold & silver articles.
Last week was
very disappointing for those who had previously been long precious metals and
very profitable for precious metals bears. A lot happened after the FOMC meeting
and the Federal Reserve Chairman’s statement on June 19, 2013.
the confirmation of the Fed's intention to withdraw from QE3 clearly helped the
American dollar. After about three weeks of the currency declines, last week
brought the breakout and a start of a rally.
The strengthening of the U.S. dollar was a strong blow not only to the
currencies, but also to commodity markets.
After Bernanke’s comments, pessimism transpired to the precious metals markets
and we saw some of the biggest swings in this sector.
The sell-off in precious metals pushed gold and silver to lower levels and last
week they hit new 2013 lows but haven’t found the bottom quite yet, as it seems.
On Friday gold fell below its technical support around $1,285-1,308 per ounce.
The decrease in the yellow metal triggered a plunge in silver. The white metal
has been beaten in the recent months even worse than gold, and on Friday morning
its price accordingly went down to the lowest level since September 2010.
Could these events
trigger a more profound correction in mining stocks?
It’s said a
picture is worth a thousand words. So let’s take a look at some charts below and
try to come up with a thousand words to describe what we see (charts courtesy by
At the begining, we think it would be interesting to revisit the silver-to-gold
ratio to see how the two are valued relative to each other. Perhaps this will
provide some clues.
When you take a look at this chart you can ask a simple question: is the bottom
already in? Several weeks ago we mentioned the silver-gold ratio as one of the
key things to look at when making the call.
We have previously discussed how the final bottom for the white metal is
often preceded by a big underperformance of silver to gold. This is yet to be
seen, so lower prices are likely still in the cards for the white metal, and the
rest of the sector as well.
There’s been no sharp drop so far, so the bottom is likely still ahead of us. If
that’s the case and the entire precious metals sector is about to move lower,
how low can mining stocks go?
Let's take a look at two of the most followed commodity stock indices - the
Philadelphia Gold/Silver XAU Index and the AMEX Gold Bugs HUI Index.
The XAU Index is above our initial target (84) for this decline (or at least it
was at the moment of creating the above chart). As you know this target level
was created from the rising support line based on the late 2000 and 2008 lows.
However, it seems that we could see a move even below that level and a local
bottom will probably form slightly above 80. This is the range that likely needs
to be reached before the declines in the mining stocks and the precious metals
sector come to a close.
This might be a great buying opportunity or – more likely – there beginning
Now, let’s have a look at the HUI Index. The chart below expresses a simplicity
that betrays potential information on where this market may ultimately be
Last week gold mining stocks have continued their decline. Although investors
have been selling their shares fear remains in control. However, this may not
last much longer. As we mentioned above it seems that miners might move even
below the initial target of 84 for the XAU Index.
In this case, it is the HUI Index that enables us to create a better price
There is a major support zone drawn on the chart which is a worst case scenario.
The red ellipse on the above chart includes both important support levels – the
61.8% Fibonacci retracement level and the 2008 low. There’s one more thing that
we didn’t mark on the chart and that is the price gap close to the 300 level
(the gap was formed in April). Such a price gap sometimes indicates that at the
time when its formed, the market is halfway done rallying or (in this case)
declining. Taking this analogy provides us with a target in the marked area as
Our final chart today is the gold-stocks-to-gold ratio which is one of the more
interesting ratios there are on the precious market.
The above chart
provides a very bearish picture. We see that the decline continues and that the
ratio is quite far from its target – the 2000 low.
Please note that the trading channel and the next horizontal support intersect
at a point much lower than where this ratio is today.
As we wrote over a month ago in our Premium Update on May 17, 2013:
The ratio has already broken below the previous late 2008 major low (…). This
is a major breakdown and it was confirmed. The implication is that the trend is
With the trend
being down and accelerating and the recent breakdown being confirmed, there is a
good possibility that the miners will decline significantly once again.
The ratio might move to its target level – the 2000 low - close to the 0.135
level, which is a quite clear forecast as far as direction of the next move is
Summing up, the outlook for mining stocks remains bearish and the
correction is likely still not over. There may be many obvious, and not so
obvious reasons for this recent underperformance of the precious metals sector,
but the charts are quite clear. In our view it does not seem that the final
bottom for mining stocks is already in at least not based on last week’s closing
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
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above is based on careful research and sources that are believed to be accurate,
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