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Gold Miners Finally Start to Outperform

by John Rubino on June 3, 2012 · 9 comments

Okay, we get it: gold miners are not the same thing as gold. Mining is a business with all kinds of issues that have nothing to do with the metal’s price. Shafts can cave in, governments can demand contract revisions or nationalize foreign-owned properties, and energy and labor costs can go up faster than revenues.

Oil, in fact, was probably the main reason that mining shares have tanked recently. Before it can be sold, gold in the ground and has to be dug up and processed, and this takes a lot of energy. So when oil goes up faster than gold, the miners’ margins get squeezed, they miss their earnings targets and their stocks sell off.

But the reverse is true as well — when oil goes down, miners get more profitable. And lately oil has been plunging:

Oil price at year low
The price of oil is falling again as inventories grow more than expected and signs that global consumption will slow. Benchmark light sweet crude for July delivery lost $1.27 to $86.55 US per barrel in midday trading in New York. Brent crude fell $1.68 to $101.90 per barrel in London.

The U.S. Energy Information Administration said Thursday crude supplies rose by 2.20 million barrels to 384.70 million barrels last week. Analysts had expected a gain of 100,000 barrels.

Because oil is priced in U.S. dollars, a rising greenback — the result of a flight to safety by investors worried about where the global economy is headed — added to the downward momentum of oil prices.

And with the price of Canada’s biggest commodity export slipping, that also weighed on the Canadian dollar, which reached a low for the year, at under 97 cents US.

Oil is also at a 2012 low, and is headed for its biggest monthly decline since December 2008. Oil has dropped more than 18 per cent so far in May.

Prices are falling on expectations that the world won’t use as much oil this year as previously thought. Europe’s financial crisis is the most immediate concern, but there have been plenty of signs of weaker demand.

Oil rose near $110 per barrel in February because of the potential for conflict between Iran and the West. Those tensions have eased somewhat, and the market’s focus has turned to weak spots in the global economy.

Prices have been falling due to a variety of factors. On Thursday, the U.S. reported that the economy grew by 1.9 per cent in the first quarter, slower than first estimated.

The number of Americans seeking unemployment benefits also rose last week to a five-week high.

Tensions also are easing over Iran’s nuclear program, reducing chances for a conflict in the Persian Gulf. And China’s manufacturing sector is slowing down while Europe’s banking crisis threatens to plunge the region into recession.

Note also that falling oil puts pressure on the currencies of resource economies like Canada. Since miners pay their workers in local currency, a falling C$ makes mining in Canada even less expensive. The result, this past week, was a nice pop in gold mining shares relative to the underlying metal:

No guarantee that this continues of course, but the odds are that it will, if for no other reason than mean reversion. The miners have underperformed gold for so long that a snap-back is overdue, and could be massive once it gains some traction.

  • paper is poverty

    I recall that the miners began rallying back months earlier than the broader stock markets during the late 08 / early 09 crisis. So, even if broader stocks are headed down I could see the argument that miners might have already had their correction and might do well from here on out. And James Turk could be right that in the next major crisis, unlike in 2008, gold and silver will not get hit as hard (they are presumably only in strong hands right now, and central banks are buying again). But I still don’t have the stomach to buy miners yet. The way the 50-dma has gone decisively below the 200-dma on the HUI and GDX is reminiscent of August & September 2008 on the 5-year chart. And another massive liquidity squeeze & the sell-off of virtually everything would make sense if Europe is about to fall apart.

    Then again, I’ve made the classic mistake of selling out of a bull market (I used to own miners) and then waiting for the elusive “perfect time” to get back in again, which may or may not ever arrive.

  • http://independentstockanalysis.com/ JJ Butler

    On the back of Friday’s disappointing jobs number, the gold equities outperformed the S&P 500 by over 900 basis points. The stock market was clobbered and the precious metal complex spiked and then continued to rally. The realization occurred debasement is closer at hand, and printing is the main option.

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  • http://FutureMoneyTrends.com Daniel A

    John,

    Great article and kind of almost controversial at this point in time. A lot of people in the gold community are giving up on the miners and going to physical only. I’m buying the miners on the dip, looking forward to big returns as people hopefully flood into them and not the GLD and SLV.

    Regards,

    Dan

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  • http://www.goldetfs.biz GoldETFs

    We have been watching the gold mining ETFs like GDX, GDXJ, GGGG, and RING and they certainly have been at points of extreme disconnect. For a handy tool to compare all gold ETFs by performance and other factors check out our gold ETF list. http://www.goldetfs.biz/gold-etf-list
    Keep up the great insight!

  • W G Thompson

    If the Euro survives, it’ll mean defla-
    tion, gold will languish. If it fails,
    and Germany goes back to the D-mark,
    gold will respond with a shy double.
    Then it’ll be sauve qui peut, and those
    who hold silver coins will no longer
    have to suffer inferiority complexes.
    vty, WGT

  • http://mojavegold.net D Weston

    The most prolific way to take advantage of gold and gold stock is to visit mojavegold.net -

  • Joanne

    The weird thing I think is that gold is being siphoned from GLD. That will make a big mess of the ETFs. Nightmare.


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