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Gold and Silver Stocks: A Dramatic Change in Fundamentals or a Short-Term Anomaly?

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Miners can be quite volatile on a short-term basis. Expect to see similar volatility when the rally resumes.

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The stock exchange is a very volatile, emotion-driven place. Even though most of the time one can predict future moves in particular assets with decent effectiveness, every once in a while abrupt and unexpected market moves take place. And we have just seen such violent and heavy declines in precious metals mining stocks.

Sadly, no one is able to foresee the future with 100% certainty and this is why diversification is such a crucial concept in investing. It would have certainly protected gold and silver investors' profits or at least diminished their losses had they invested not only in mining stocks but also in metals themselves.

Now, the following question arises: Is this a sign of some important change in the mining stocks sector or just a short-term anomaly? Let's take a look at the charts to find out – we'll start with the miners to gold ratio (charts courtesy of http://stockcharts.com).



On the above chart, we see that the ratio plunged this week. This is seen every few months and is almost always followed by an immediate reversal and a rally in prices. This can be seen in August 2011, October 2011, and January 2012. Very sharp declines are followed by strong rallies, and this is also seen in early July 2012. This was actually the final buying opportunity before a strong rally emerged in gold prices. At that time, the RSI was extremely oversold, and this is the case today as well. Although it may be difficult to believe, the situation is still bullish in this chart.

Now, let us move on to junior mining stocks.



In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see a move below the horizontal support line. This move was sharp, sudden and has not been confirmed. We expect to see an invalidation of the move in the coming week. Since this breakdown was not confirmed, the situation has become only slightly more bearish this week. Not much weight is placed on this signal given the situation in the rest of the precious metals sector.
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No positions in stocks mentioned.
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