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Understanding Mining Companies’ Performances in Relation to Precious Metals

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Aug. 3 2016, Published 11:56 a.m. ET

Mining companies followed gold

Most mining companies have reversed their 2015 losses during the first few months of 2016 and have posted substantial gains. The correlation between mining stocks and precious metals remains high.

On average, mining companies follow the direction of gold prices about 50% of the time. After the recent Fed meeting, precious metals were relieved, and so were mining stocks.

The UK’s recent Brexit vote has meanwhile affected mining companies as well, just as it affected precious metals. Both gold and silver rose to two-year highs due to safe-haven bids in the wake of global turmoil, and so most mining shares saw positive days following the UK’s Brexit referendum. However, as of August 2, the pace has begun to slow down.

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Agnico-Eagle Mines (AEM), Primero Mining (PPP), Silver Wheaton (SLW), and Harmony Gold (HMY) have risen by 126%, 0.88%, 135.3%, and 412.4%, respectively, on a YTD (year-to-date) basis. The VanEck Vectors Junior Gold Miners ETF (GDXJ) has increased by 164.7 % YTD. Due to mining stocks’ sudden substantial increases, many are trading close to or above their target prices.

Technical indicators

Agnico-Eagle is trading above its target. Agnico, Primero, Silver Wheaton, and Harmony are trading at massive premiums of 27.9%, 17.3%, 42.2%, and 32.1%, 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 mining companies are falling, as are the RSIs of precious metals. Remember, an RSI level above 70 indicates that a stock has been overbought and could fall, while an RSI level below 30 indicates that a stock has been oversold and could rise.

On August 2, 2016, GDXJ’s RSI reading was close to 63.5.

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