Are Gold and Silver Mining Stocks Still Worth Your Investment?

By Przemyslaw Radomski, CFA  OCT 23, 2012 4:00 PM

Even though the short-term outlook for mining stocks is a bit unclear, the medium term case is very bullish -- especially for the junior mining stocks.


Last Tuesday we posted an essay entitled Gold & Silver Mining Stocks Hold Well Despite Metals’ Correction and we summarized it in the following way:
The correction in the precious metals market may not be over at this point, but when it is over, miners might finally outperform the underlying metals once again.
Let’s see if this is still the case by examining the HUI Index (INDEXNYSEGIS:HUI) chart (charts courtesy of

In this week’s medium-term HUI Index chart, we have mixed implications for the short term, but the outlook is definitely bullish for the medium term. The recent declines have not been that significant given the corresponding move in gold prices – and in case of the last several days, moves in the general stock market.
Speaking of the general stock market, let’s take a look at how stocks fared recently.

Click to enlarge
At the moment of writing these words, we have the S&P 500 (INDEXSP:.INX) at 1413, which is a bit below the 2008 high, but considerably above the red rising support line that you can see on the above chart. Consequently, even if what we’ve seen so far this week is a beginning of a major decline in the stock market (which we don’t think is likely because of the upcoming elections – the powers that be definitely don’t want to see plunging stocks right before voters go to their booths), we will see a pause quite soon. As mentioned above, the US election is just around the corner and this is a short-term reason to believe that a rally in the stocks will be seen in the following weeks, not a major decline. The open-ended quantitative easing program is a medium-term reason for a rally. Does it have anything to do with mining stocks? It sure does. For instance, juniors are highly correlated with the general stock market, so the above is a positive factor for the former. This is confirmed by the coefficients in the correlation matrix (third line from the bottom), that can be found in our previous article, Is the October Correction in Gold Already Over?

In the long-term miners-to-gold ratio chart, we see that the ratio held quite well recently. The implication here is – once again – that declines in the mining stocks may not be as painful as in the metals themselves. After all, mining stocks rallied on Friday even though gold didn’t. If a rally is indeed ahead in the general stock market, the miners may not be greatly affected by declines in the precious metals.
On the other hand, they may see daily declines (when metals decline) followed by a quick reversal (when metals do nothing and stocks rally) to the upside or simply small declines as compared to the metals. This is one of the reasonswe suggested (last week) closing short positions in the mining stocks and keeping those in gold and silver open.
We summarized our latest essay by saying:
Is the correction in gold over? Not likely.
At this point (with HUI at 490) it may be close to being over in case of mining stocks even though the short-term picture is rather blurry. The medium-term picture looks very favorable, though. If one wants to invest in the mining stocks in the medium or long term, then the question is if one should choose junior mining stocks or big precious metals producers (such as companies that are included in the HUI Index).
At this point it seems that juniors offer greater potential not only because of the situation in the general stock market, but because of their own technical situation.

In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), the outlook remains bullish even with the declines seen in precious metals’ prices over the last two weeks. The index remains above its support line, and the outlook makes the picture bullish.
Summing up: Even though the short-term outlook for mining stocks is a bit unclear, the medium term case is very bullish in my view – especially for the junior mining stocks.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.