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Will Gold Miners Underperform Precious Metals in the Weeks to Come?

Commodities / Gold and Silver 2012 Aug 25, 2012 - 01:17 PM GMT

By: P_Radomski_CFA

Commodities

Best Financial Markets Analysis ArticleFish are jumping and the cotton is high. Yes, it’s summertime and the living is (quantitatively) easy. At least that’s how it looks from the Federal Open Market Committee minutes for the July/August meeting that revealed support among some of the members for a new round of quantitative easing. With the release of the minutes Wednesday, gold went up and the U.S. dollar took a dive. The Fed members see three pitfalls for the economy-- the sovereign debt crisis in Europe, a global economic slowdown led by China and other BRICs, and the fiscal cliff, which could result in substantial fiscal contraction. (Fed Chairman Ben Bernanke has repeatedly asked Congress to solve the problem, but with a Presidential election coming in November it is difficult to see how Republicans and Democrats will reach an agreement.)


Gold investors combed through the text of the FOMC’s latest minutes to find a nugget that will make the value of their nuggets go up. What they found was a single sentence towards the end of the meetings that went like this:

Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

This sets the stage for further monetary easing possibly at the Fed’s Jackson Hole, Wyoming meeting slated for the end of this month.

Waiting for other hints from the FED, let’s now turn to the technical part of today’s essay with the analysis of the mining stocks (charts courtesy by http://stockcharts.com.).

In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see a rally but it is quite small especially when compared to the recent several-week-long rally in the general stock market. It is likely just a correction after a breakdown below the recent huge head-and-shoulders pattern, so the implications are bearish for all precious metals mining stocks, not only for juniors.

Let’s now move on to a very interesting chart that gauges the performance of mining stocks relative to gold. It can shed light on which group of assets (miners or the underlying metals) will perform better in the next couple of weeks.

In the miners to gold ratio chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), the medium-term trend is down and the recent rally here does not change the overall outlook. A short-term overbought status has actually been created, a situation not seen since previous local tops and the final top of 2011 which followed a big rally. The implications are bearish, the trend is likely to reverse, and the miners are likely to underperform the underlying metals in the coming weeks.

Summing up, the situation is less favorable for the precious metals mining stocks than it is for the underlying metals.

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Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
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    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.

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