Most mining companies reversed their 2015 losses during the first few months of 2016 and have posted substantial gains. There is a high correlation between mining stocks and precious metals.
On an average, mining companies follow the direction of gold prices about 50% of the time. After the recent Federal Reserve meeting, precious metals and mining stocks were relieved.
The Brexit vote also affected mining companies, just as it affected precious metals. Both gold and silver rose to two-year highs due to safe-haven bids in the wake of this global game-changer.
However, precious metals seem to have settled down a bit after fearing the sooner-than-expected interest rate hike. Miners are also expected to suffer due to the falling bullion prices, and they fell on Wednesday, August 24.
The year-to-date gains of these companies are now slowly falling due to the heavy losses over the past month. Eldorado Gold and Alacer Gold had three-month losses of ~18% and ~2.6%, respectively. The other two miners—IamGold and Harmony Gold—maintained their gains during this period.
Most of the miners are now trading closer to their 100-day moving averages, in contrast to their previous huge discounts with respect to the 100-day moving averages. A huge premium over a trading price suggests a possible fall in prices, and discounts may indicate a rise.
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 24, 2016, the VanEck Vectors Junior Gold Miners ETF’s (GDXJ) RSI reading was close to 35. Most of the miners are close to the 30 mark.