How Closely Are Mining Companies Following Gold?



Reaction of mining companies

Precious metal mining companies suffered in 2015 due to losses in precious metals. In 2015, precious metals took much of their fluctuations from the US Federal Reserve meetings, which determined whether or not to hike the interest rate. On average, mining companies followed the direction of gold prices about 50% of the time.

Meanwhile, the UK’s Brexit vote in June substantially affected mining companies and precious metals. Gold and silver rose to two-year highs due to safe-haven bids in the wake of this game-changing global event, and now, another possibility of a rate hike in the US has started to play on these metals.

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Notably, Cia De Minas Buenaventura (BVN), AngloGold Ashanti (AU), Hecla Mining (HL), and Kinross Gold (KGC) have seen YTD (year-to-date) rises of 229.7%, 112.8%, 200%, and 129.1%, respectively. The VanEck Vectors Junior Gold Miners ETF (GDXJ) has also seen a substantial YTD rise of 131.5%. But these YTD returns have also seen sharp falls during the past few months, causing mining companies to react.

Technical indicators

Most mining companies are now trading closer to their 100-day moving averages. Remember, a substantial premium over a trading price suggests a possible fall in price, and a discount could indicate a rise. However, the target prices for all the above four mining companies (except Cia De Minas) are significantly above their current prices, suggesting a positive outlook. 

That said, RSI (relative strength indicator) readings of mining companies are falling, as are the RSIs of precious metals. On September 20, 2016, the RSI for the VanEck Vectors Junior Gold Miners ETF (GDXJ) was close to 45, and these very low RSI levels (below 30) suggest a possible pullback in prices.

In the next and final part of this series, we’ll discuss the correlation of mining companies to gold.


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