For the most part positive fundamentals (for gold mining companies) refers
to rising Gold prices. However, this neglects the things under the surface
which can affect margins as much as headline prices and in some cases more.
In the chart below we plot Gold priced in Canadian Dollars, Gold against Oil
and Gold against Industrial Metals. Before we get to the chart let me explain
why these ratios are important. First, the vast majority of gold mining firms
are headquartered in Canada. The loonie is their local currency. The Canadian
Gold price for firms that operate mines in Canada or explore in Canada can
be more important than the US$ Gold price because their costs are in Canadian
Dollars and not US$'s. Thus, a weak loonie rather than a weak US$ is a benefit.
Second, the Gold/Oil ratio is important because energy costs can account for
25% of a miner's costs. Mining is an extremely energy intensive activity.
The chart below shows that the Gold price in Canada has surged while the Gold/Oil
ratio has exploded. We also plot Gold against Industrial Metals as a proxy
for other industrial related mining costs. That ratio has increased materially
in favor of Gold but not to the degree of the other ratios.
As evidenced by GDX, the miners formed a strong double bottom and rebounded
to the 400-day moving average which is key bear market resistance. The miners
did not have that type of support at other lows (such as in June 2013 and December
2013). Moreover, the miners did not have improving margins thanks to plunging
energy prices and a much weaker local currency.
The miners have made progress in recent months but the bear market won't be
over until GDX can clear its 400-day moving average. The good news is the miners
formed a bullish double bottom after reaching arguably their second most oversold
point (from a long-term sense) in the last 70 years. That was followed by the
positive developments discussed above and word that the likes of Jeff Gundlach
and Jim Rogers became investors in the sector. A new bull market lies ahead
sooner rather than later but investors and traders need to maintain their discipline
and patience.
Good Luck!
