Mining companies follow 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, almost 50% of the time, miners follow gold’s price direction. Gold’s gains were once again replicated by mining stocks on July 13, 2016.
The recent Brexit vote has remained influential. Extended uncertainties after the Brexit vote have buoyed gold and silver. Both rose 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.
Stocks of New Gold (NGD), Newmont Mining (NEM), Sibanye Gold (SBGL), and Gold Fields (GFI) have risen by 108.6%, 127.2%, 178.8%, and 119.9%, respectively, on a YTD (year-to-date) basis. Safe-haven bids were the most important factors behind the rises of silver and silver mining companies.
The VanEck Vectors Gold Miners ETF (GDX) has risen by 121.4% YTD. Due to mining stocks’ sudden substantial rises, many of them are trading close to or above their target prices. However, except for Gold Fields, all three of the above-mentioned miners are still below their target prices, suggesting possible price rises.
New Gold, Newmont, Sibanye, and Gold Fields are trading at massive premiums of 18.3%, 28.5%, 22.4%, and 44%, 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 these four mining companies and most other miners rose considerably after the Brexit vote. However, they fell on July 12.
An RSI level of above 70 indicates that a stock has been overbought and could fall. An RSI level of below 30 indicates that a stock has been oversold and could rise. GDX’s RSI is close to 65.4.