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Six months ago I wrote that the
gold mining
stocks were on the runway and ready for take-off. I expected the gold mining stocks from that
point to start outperforming gold bullion itself. Since then, however, little
has happened.
I use the rate-of-change (ROC)
in the price of the XAU Mining Index compared to the gold price to show their
relative performance. Their ROC has moved sideways for six months, as can be
seen in the following chart.
Note the green line on the above
chart. When writing six months ago, I didn’t expect that a
“runway” would literally be formed. But there it is, and it
stands in stark contrast to the six other reversal points on this chart.
This chart clearly illustrates
how sharp those previous reversal points were; they all happened quickly. But
not this time around. What does it mean?
I’m not sure if this break
from past patterns is significant. But from a purely technical point of view,
it is possible that the last six months of sideways movement is in fact a
consolidation pattern. If so, that pattern would indicate that the XAU will
continue underperforming gold bullion, if the green line eventually gives way
as a result of the ROC moving lower. In that case, the ROC could perhaps even
move to the same -47.4% level reached at point #5 in October 2008, marking an
historic level of underperformance. That is not a cheerful prospect, but if
it occurs, that event would create a double-bottom in an area of extreme
undervaluation in the mining stocks compared to gold bullion itself.
The bullish view is that the
“runway” being formed does not matter, which is how I see it. To
me the significant development is the improving cash-flow some of the major
mining companies are generating, with dividend increases as a result.
Given that I expect gold to keep
climbing higher in its long-term bull market, I continue to view the mining
stocks to be significantly undervalued. And maybe – just maybe –
the prices of gold mining stocks are finally ready to take off from that
runway and start climbing more rapidly than gold.
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