Miners are hurt again
Most mining companies reversed their 2015 losses during the first few months of 2016 and posted substantial gains. There’s a high correlation between mining stocks and precious metals. On average, mining companies follow the direction of gold prices about 50% of the time. After the Fed’s recent meeting, precious metals and mining stocks experienced some relief. However, they’re experiencing losses again.
Fear about how an interest rate hike would impact US Treasuries had a negative impact on precious metals as well as mining shares. Precious metals are non-yield payers, so their opportunity costs rise when interest rates rise.
Most miners have seen losses year-to-date, leading to trailing-30-day losses. Giant mining companies such as Hecla Mining (HL), Kinross Gold (KGC), Eldorado Gold (EGO), and Alacer Gold (ASR) witnessed a fall in their prices due to receding precious metal prices on September 8, 2016. Giant miners like Newmont (NEM) and Barrick Gold also fell.
Most miners are now trading close to or below their 100-day moving averages—in contrast to their previous huge premiums. A huge premium over a trading price suggests a possible fall in the price, while a large discount could indicate a rise.
The RSI (relative strength index) readings for mining companies fell along with the fall in precious metal prices. However, compared to the previous week, the RSI levels are higher. Remember, an RSI level 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.
On September 8, 2016, the VanEck Vectors Junior Gold Miners ETF’s (GDXJ) RSI reading was close to 52. Most miners recovered from RSIs that were near 50.