Sunday, February 10, 2013

VB Update Notes for February – March 2013 – What is wrong with This Picture?

HOUSTON – The market for junior miners and explorers remains in the grip of an extended, wicked, relentless cyclical bear market inside a secular bull market. As we write in early February, 2013, the long- expected resurgence of interest in the issuers we refer to as The Little Guys; and the expected switch from negative to positive liquidity for the smaller, less liquid and more speculative miners and explorers that would show up coincident with it; “The Big Reversal,” to give it a name, is so far MIA.  Just below is a simple graph of the Canadian Venture Exchange Index or CDNX compared to gold for a visual reference.

20130210 CDNX Graph 1

The best we can point to in the chart above is that the CDNX has not printed a new low since the middle of last summer (June of 2012) and it does look to be attempting to finally break out of the very wide falling wedge – just not yet with anything approaching confidence. As one of our colleagues said recently, “...the juniors seem to be bottom crawling, unable to climb very much, so far, but at least they have stopped plunging every week.”

Note the huge divergence which has developed between the price of gold and the CDNX. It is a testament to just how out of favor The Little Guys are at the moment. The CDNX has not been this mistreated since 2009, right after the world thought the banking system was near imminent collapse.


It is not news to remind us that The Little Guys are still in a bona fide bear market, but it is not just the smaller issues that have been stinking up the joint. Weakness in mining shares of all kinds is curiously, counter intuitively and unbelievably persistent. Just looking at recent history the Big Miners have been downright puny since at least October of last year as shown in the short term AMEX Gold Bugs Index (HUI) with Gold chart just below.

20130210 HUI Graph 2

You know, one could be forgiven for thinking that the Big Miners really ought to be doing better in a $1,600 plus gold and $30 plus silver world.

Had someone told us in late 2008 or early 2009, when gold had just harshly corrected back to the $700s and silver dropped below $9, that the HUI would only be in the 400 neighborhood with gold more than double then and silver more than triple, we would have laughed aloud at them. The thought would have seemed preposterous then.

Yet, here we are. Gold and silver ARE in the $1,600s and the $30s respectively, the smaller miners have been clobbered, not rewarded and the Big Miners have utterly failed to answer, much less leverage the good gains in precious metals since that terrifying Great Panic of 2008-9.

Now, perhaps, is a good time to look at a much longer term chart of the relative performance of the Big Miners to gold as an instructive tool. StockCharts has data going back to 1984 that we can access. Since the HUI does not go back that far, we substitute the Philly Gold and Silver Index (XAU) below.

This chart measures the relative performance of the XAU and gold in a ratio (XAU:Gold Ratio) monthly, with gold shown in green (left axis).

20130210 HUI Gold Ratio Graph 3

What is wrong with this picture?

Incredibly, with gold high consolidating in a $1500 to roughly $1800 range, the XAU:Gold ratio spent the better part of 2011 and 2012 working its way back down to the panic inspired extreme lows of the 2008 banking and financial system crisis panic.

Notice, however, that the ratio only briefly tested the sub .10 lows in 2008 and early 2009, leaving long tails or shadows on the monthly trading bars. Since the end of 2011, the ratio has camped out very close to those lows.

What does the chart mean? Well, for one thing it means that today mining shares are about as cheap as they were during the financial crisis panic peak in 2008 relative to gold metal. While we do expect the XAU:Gold ratio to decline with gold in a raging bull market based purely on the math, we do not really expect to see the XAU:Gold Ratio revisiting the panicky 2008 lows, except, perhaps in spikes lower; not when gold is high consolidating - like now.

Gold is consolidating, not plunging. The miners are discounting the latter, not the former, for now.

And just so we do not get accused of using a “parlor trick” in order to over-push a point, below is the same time period with the nominal prices of both the XAU and gold.

Chart showing the XAU, monthly, with gold in green, nominal.

20130210 HUI Gold nominal Graph 4

Notice please, that for decades the XAU found important resistance as it neared about 150 – a resistance finally cleared convincingly in 2007 just before the wheels came off the global financial station wagon. We deem that level near 150 as a very important congestion or pivot area and also very powerful long term.

Notice, please, that previous assaults on the 150 level in the 1980s, 1990s and mid 2000s were all with gold below $650 an ounce. That’s $650 an ounce, not $1,650.

In charting it is a time honored axiom that long period resistance, once defeated convincingly, then becomes new staunch support. If we take out the deep “V” anomaly for the 2008 crazy period entirely, as if it never occurred (kind of like throwing out an anomaly in a statistical dataset), then what we are looking at above is a retest of what should be very important support for the XAU index.

The prior chart (XAU:Gold ratio) helps us to quantify and understand just how bloody strong the support OUGHT to be here near the 150s.

Like everything else in charting, seldom do long term levels prove themselves exactly to the number or to the right of the decimal, as they say, so we have to be willing to allow a few points of grace either way. In other words, if we end up seeing the XAU bottom this time in the 140s or right where it is, we would call that a bull’s eye test of former resistance turned support.

And yes, we understand that the XAU constituent companies have bloated share counts relative to then and they have done a miserable job of providing shareholder value up to just recently, but our sense is that they are coming around to the notion that bigger for bigger’s sake is not a good business plan. We believe they are finally taking the notion of shareholder value a bit more seriously – in fits and starts and with some exceptions.

To answer the question “what is wrong with this picture?” The answer for the XAU is that near 150 has been associated with much, much lower prices of gold in the past. Even with the up to now poor performance of the miners, with gold at least $1,000 higher than the index is currently discounting, it does seem “wrong” to us to see the XAU retesting the former resistance, but there you go.

That’s actually a good thing. If the markets always priced everything fairly there would be few, if any opportunities for investors and speculators.

Now, as we usually do, let’s turn to the short term comparison chart for the Market Vectors Junior Gold Miner’s Index ETF or GDXJ and the CDNX.

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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

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