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Analyzing Miners’ Relative Performance Compared to Gold

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Miners followed gold

Most mining companies reversed their 2015 losses during the first few months of 2016. They posted 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. After the Fed’s meeting, precious metals and mining stocks were relieved. Japan’s stimulus added to the rise in precious metals. The VanEck Vectors Gold Miners ETF (GDX) also rose ~2.8% on Friday.

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The recent Brexit vote has been impacting miners and precious metals. The recent terrorist attacks in Europe couldn’t hold gold higher for long. Both gold and silver rose to two-year highs due to additional safe-haven bids in the wake of the global turmoil. Most mining shares saw positive days following the Brexit vote. However, the pace is slowing down.

Barrick Gold (ABX), AngloGold Ashanti (AU), Hecla Mining (HL), and Eldorado Gold (EGO) have risen 106%, 202.9%, and 123.8%, respectively, on a YTD (year-to-date) basis. Safe-haven bids were the most important factors behind the rise in gold and gold mining companies.

GDX rose 149.5% YTD. Due to mining stocks’ sudden substantial increases, many of them are trading close to or above their target prices. Gold Fields and Pan American (PAAS) are trading higher than their target prices. This likely suggests a pullback in prices.

Technical indicators

These four miners also trade at a considerable premium to their 100-day moving averages. Remember, a huge premium over a trading price suggests a possible fall in prices.

The RSI (relative strength index) readings for miners and precious metals are falling. 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. GDX’s RSI reading is close to 61.3.

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