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Gold,
silver, and mining stocks have been declining very rapidly in the past
several weeks and they have now reached (or are even below) our previous
target areas for this downswing. Is this a buying opportunity, or should
precious metals investors take additional new factors into account? In the
following essay we would like to provide you with our thoughts on the current
situation in the precious metals stocks: both big senior companies
(represented by the HUI Index
and the GDX ETF)
and the small-cap juniors (represented by the TSX Venture Index)
Let's
begin with the HUI chart (charts courtesy of Stockcharts.com) for
more details. (Click to
enlarge)
The
precious metals stocks are trading mostly in tune with gold and the general
stock market lately (and inversely to the USD Index) and consequently the
situation here is very similar to what the situation on other PM markets -
namely that there is a high risk that the main stock indices plunge and drag
the PM sector with them.
The
current move lower in the precious metals has been very rapid and the RSI
Indicator flashed a buy signal recently, but once again, high correlation
between PMs and the general stock market is a major factor here, and the
latter does not seem to have bottomed at this point yet.
The
RSI indicator was just below the 30 level, but that was also the case in
August 2008, which marked just a beginning of a major move down. Let's take a
look on the short-term chart for more details.
The
value of the GDX ETF (proxy for precious metals stocks) has reached the
downside target for this rally, but there are two more factors that need to
be taken into account here - volume and the high correlation with the general
stock market.
As far
as the volume analysis is concerned, please note that major bottoms in PM
stocks are rarely accompanied by such a huge volume that we've seen recently.
Consequently, GDX may still move lower, unless we see signs of disconnection
between PMs and the general stock market.
Moving
on to the juniors sector, the comments that we made on January 15th are still
up-to-date:
There
is one more thing that I'd like to comment on this week, and that is the
situation in the junior sector. While this is nothing new to you, if you've
been following our commentaries for over a year, it seems that it may prove
useful to remind this part of our analysis to new Readers. In the essay
posted on September 19th, 2008, we
wrote the following:
(...)
junior/senior ratio is reasonably correlated with the general stock market.
This is another thing that justifies the severity of this decline. As the
stock market fell, the junior/senior ratio plunged as well. The marked
rectangles on the chart are periods where juniors rallied relative to the HUI
Index - it was accompanied by a rise in the general stock market. The
question is what will happen next on the main stock indices.
The
juniors have been rallying recently, but so did the general stock market, which
is another confirmation of the points raised over a year ago. Since the
general stock market is likely to move lower sooner or later, it may mean
that the juniors' outperformance will also disappear for some time.
Please
note that the correlation
numbers currently imply that the general stock market has a very strong
influence on the junior sector.
Consequently,
if you are heavily invested in juniors, you may want to consider switching at
least a part of your holdings into big, senior PM stocks, bullion, even cash
(depending on your investment preferences). If you are risk averse, switching from juniors into
physical gold/silver, seems to be a good idea.
Please
note that juniors' outperformance ended just a few days after that update was
posted.
The
situation on the general stock market appears to have influenced juniors'
outperformance as indicated earlier. Since we don't see sings of strength in
the general stock market at this moment, and we are not in the final stage of
a rally, we don't think that juniors are the best place for one's capital at
this moment.
Summing
up
The
situation in the precious metals market is currently particularly interesting.
The PM stocks have been moving sharply lower in the past several weeks, which
should normally create a favorable buying opportunity.
Still,
the general stock market is once again highly correlated with PMs (and with
the USD Index), which means that one shouldn't ignore the strongly bearish
signals that it generates. At this moment, the general stock market appears
to be one of the most important factors to consider.
Disclosure:
no positions in stocks mentioned
All
essays, research and information found above represent analyses and opinions
of Mr. Radomski 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 respective essays at the time of
writing. Although the information provided above is based on careful research
and sources that are believed to be accurate, Mr. Radomski and his associates
do not guarantee the accuracy or thoroughness of the data or information
reported. The opinions published above belong to Mr. Radomski or respective
associates and are neither an offer nor a recommendation to purchase or sell
securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski
does not recommend services, products, business or investment in any company
mentioned in any of his essays or reports. Materials published above have
been prepared for your private use and their sole purpose is to educate
readers about various investments.
Przemyslaw Radomski
Editor,
www.sunshineprofits.com
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