Monday, September 6, 2010

Mining Juniors Take the Gold Bull Lead

The Gold price has been on a tear this summer since July 26th, 2010. Gold has moved from $1155 USD to a peak of $1255 USD reached on September 1st, 2010. That is a move in the price of Gold of about $100 or 9%. As the author types on September 5th, Gold is sitting at $1251 USD.

Figure 1: Gold Price Summer 2010

The gold price chart in USD above shows the strong trend upwards in the gold price. Are the gold mining equities following the metal's lead? Is there any difference in performance between the major Gold miners and the smaller juniors? Let us take a look at the performance comparisons and draw some conclusions.

Mining Sentiment recovers from Sell in May Early
I like to use the Canadian Venture exchange as an indicator of sentiment in the mining markets. Though the exchange has some non-mining issues, the majority of the stocks listed are small miners. The following chart shows that the Venture Index has recovered early this summer in the beginning of July from the “Sell in May” syndrome.

Figure 2: TSX Venture Index - Recovers from Sell in May.

Note the steady trend upwards since July for the TSX- V index. Also, note the long white candle for Friday September 3rd, 2010. That means the markets are anticipating a strong move up this fall for mining equities.

Precious Metal Equities Poised for Progress
The Gold Bugs Index, known affectionately as the HUI, is the index of large gold miners that trade on the AMEX and it tracks 15 miners that are mainly unhedged to the gold price.

Figure 3: HUI - Summer 2010 Moves Higher

The “HUI” index, as shown in the chart above, has moved from the low of 429 on July 28th to a high of 496 that was hit on August 31st, 2010. That is a move of 67 points or 16%. Relative to the rising price of gold moving higher by 9%, the large miners have moved roughly 70% more. This is clearly showing the leverage of the large mining equities to the rising gold price.

Senior Gold Miners Move Higher
The HUI is rather restricted being composed of only 15 large miners. There is another index of a larger group of 35 miners that trades on the NYSE known as the Gold Miners Index, the GDM. Market Vectors has an ETF known as the GDX that tracks this index.

Figure 4: GDX Summer 2010

As shown on the chart above, the GDX has moved from a low on July 26th, 2010 of 46.80 to a high of 54.49 that was set on August 31st, 2010. That is a move of 7.69 points, or 16%. The move was virtually identical to the 16% move by the HUI index.

Junior Gold Miners Move the Most!
Anticipating the interest in smaller gold miners, Van Eck Global initiated a junior Gold miner index in November, 2009, the GDXJ. Compared to the average capitalization of $15 billion for the constituents of the GDX, the average capitalization for the constituents in the GDX Junior (GDXJ) is much under $1 billion. The chart following is the performance of the GDXJ over the last four months.

Figure 5: GDXJ - Summer 2010 - Leaps Higher

From the chart above, the GDXJ hit a low of 25.10 on July 19th, 2010 and is still rising, as of September 3, 2010, it hit a peak of 32.34. That is a move of 7.24 points or a move of 28.8%. This is relative to the 16% move of the Gold mining seniors and a 9% move in the price of the underlying Gold. The Gold mining juniors have leveraged the gold price movement by a factor of three or an astounding 300%.

Note also, in comparison to the Gold price move, the Juniors bottomed first on July 19th, one full week ahead of the Gold price bottom. Also note that the Juniors index is still moving higher on the last trading day, September 3rd, 2010, while the gold price attained a high on September 1st, 2010. Classical Gold bull theory indicates that the junior miners are the most volatile and the most sensitive (probably first spotted by the smart money), and should lead in the bull markets.

Here is a link to a previous article about a few mining juniors being in the sweet spot.

The gold price is moving forward this summer, and moving rather early for the typical fall rush. The large cap miners are leveraging the gold price movement by about 70%. The smaller gold mining juniors are leveraging the gold price movement by about 300%.

This movement upwards in the precious metals prices may not be your typical cyclical fall movement upwards. The Gold mining juniors have definitely taken the lead and this portends auspiciously for the Gold bull market.

Disclosure: Long junior mining equities

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