Permanent impairment of precious metal miners to the price of the metal

Miners not only fail to hold on to the elevated…

Miners not only fail to hold on to the elevated precious metal prices, over the long haul they gradually are lagging more and more. Since this holds for the majority of miners, both large caps and smaller miners, you cannot diversify away any specific mining risk.

Consequently all mining ETF’s lag precious metal ETF’s.: GDX and GDXJ lag GLD. On the silver front SIL lags SLV; though this trend took longer to confirm. 

Only few success stories in the mining realm outperform the metal and even among these market timing is paramount.

The Miners Performance Page splits our miners list in five quintile sections. There is no July update, therefore I show the top quintile below:

1 CanadianMinersTopQuintile2023g
Top quintile: the 20% best miners on the GoldMinerPulse list. TSX quotes are mentioned and the performance is in CAD. It may look less rosy in USD.

Twelve miners are up more than 100% since the start of observations (19 Nov 2010) or since they entered the stock market. The list is quite dynamic and exits can mean either one of these:

  1. A successful explorer, small or mid-tier miner being acquired at a decent price,
  2. A mining company experiencing some drawback merging with a more successful peer,
  3. A miner which got itself into trouble selling off some assets in an attempt to stay afloat,
  4. An outright bankruptcy: Great Basin Gold and Allied Nevada are some examples of the last few years.

Streamers and Royalty companies

Three list entries among our top performers are streamers or royalty companies: FNV (Franco Nevada),  SSL (Sandstorm Gold) and WPM (Wheaton Precious Metals). Royal Gold is not included in the list, but it performs in line with its peers mentioned above. 

Other top quintile observations

The above list does not include any real large cap miner. Lundin Gold is an emerging gold-copper producer. Filo Corp. (previously Filo Mining) is an emerging copper-gold producer. 

KNT (K92 Mining) is becoming a junior producer. Orla Mining Ltd  and Wesdome gold (WDO) are iunior producers.  Silvercrest (SILV) is a well known name in the small niche of silver producers. 

B2Gold (BTG) is the only mid-tier gold producer in the list. 

AYA Gold (AYA.TO) is still in the development phase. Osisko Mining is partnering with Gold Fields to advance its Windfall project in Quebec, Canada.

NGEx Minerals Ltd. (NGEX.V) is the base metal explorer after the spin-off of José-Maria Res. (which was aquired by Lundin Gold). Laurion Minerals (LME.V) also is an explorer.

Short term tactics

Whereas the HUI miners index is trending lower relative to the spot gold price over the long haul, short term rallies can be quite impressive. The HUI to Gold ratio is shown on a regular basis on the Gold Miner Pulse page and more comments are added on the extended Gold Miner Pulse page, which is published at least twice a year.

A fresh update of the HUI to Gold ratio is shown below:

HUI Au2023h
HUI: “Basket of Unhedged Gold Miners” relative to Gold, daily observations over the last 6 months. The 50 days moving average (blue) and 200 days moving average (red curve) are added.

Since there has been no real summer slump in the gold price (it keeps meandering between $1900 and $2000/Oz) miners started their short lived July rally. But exactly at the outbreak early July, the moving averages made a ‘death cross’. (This is when the short moving average drops below the long moving average). Eventually we faced another downturn of miners relative to gold. Mining valuations are again in line with the trend channel formed since early June and sloping down at the pace of the declining 50 dma. Over the past 6 months there has been one major outbreak from March 13 to April 15. At May 8 there has been a second top. Miners plunged relative to gold afterwards. 

FED talk culminating in the much anticipated 25 bp FED funds rate hike, spooked miners. Will the FED succeed in trimming the CPI inflation to 2%? With the budget deficit leading to a doubling of the US public debt every 8 years, it seems unlikely that inflation can be sustainably trimmed to an annual rate of  2%. Especially since the foreign appetite for US 10 year treasury bonds has waned. This is the result of rising interest rates from a historically low level, of the US sanction policies freezing assets of foreign nations and of the recent high exchange rate of the USD relative to other world currencies, including  the more ‘stable ones’. The downgrade of US public debt to AA+ may also lead to higher interest rates for US treasury bonds. What makes it worse is that during the months to come a massive amount of US treasuries come to maturity and need to be refinanced.

The interest rate on US public debt can only be capped if the FED steps in, acquiring FED notes from banks that got themselves into troubles mainly because they had acquired too many low yielding FED notes in the recent past. 

In the mean time, the SP-500 and the Nasdaq-100 remain at elevated levels, ignoring any recession indicator such as the yield curve inversion. There are too many better alternatives for gold miners, at least that is what the market is convinced of right now.

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