A Few Positive Fundamental Developments for Gold Mining Stocks
Commodities / Gold and Silver Stocks 2015 Feb 13, 2015 - 06:17 PM GMTBy: Jordan_Roy_Byrne
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!
Bio: Jordan Roy-Byrne, CMT is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2014 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor. Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.
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