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Following Their Metals, Miners Retreat

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Jul. 26 2016, Published 8:49 a.m. ET

Miners are following gold

Most mining companies reversed their 2015 losses during the first few months of 2016, posting substantial gains. The correlation between mining stocks and precious metals remains high. On average, miners follow gold’s price direction almost 50% of the time. 

The recent Brexit vote has been affecting miners just as it has affected precious metals. The terrorist attack in Nice, France, however, couldn’t hold gold higher for long. The unrest in Turkey hasn’t helped gold, either.

Both gold and silver rose recently to two-year highs due to additional safe-haven bids in the wake of global turmoil. Most mining shares had positive days following the Brexit vote. However, the pace is now slowing down. 

Silver Wheaton (SLW), Yamana Gold (AUY), AngloGold Ashanti (AU), and Hecla Mining (HL) have risen 110.5%, 191.3%, 196.5, and 218.5%, respectively, on a YTD (year-to-date) basis. Safe-haven bids were the most important factors behind the rises in gold and gold mining companies.

The VanEck Vectors Junior Gold Miners ETF (GDXJ) has risen 138.6% YTD. Due to mining stocks’ sudden substantial rises, many of them are trading close to or above their target prices. Hecla Mining is one such example of a company that is trading higher than its target price. 

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Technical indicators

Silver Wheaton, Yamana Gold, AngloGold Ashanti, and Hecla Mining are trading at massive premiums of 32.1%, 24.3%, 34.7%, and 48.6%, respectively, to their 100-day moving averages. Remember, a huge premium over a trading price suggests a possible fall in price.

The RSI (relative strength index) readings for miners are falling, as are those of precious metals. An RSI level above 70 indicates that a stock has been overbought and could fall. An RSI level below 30 indicates that a stock has been oversold and could rise. GDXJ’s RSI reading is close to 52.

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