-- Posted Friday, 9 February 2007 | Digg This Article

As you can see by the first lower panel on the chart, gold has continued to fulfill our favored scenario where oil, copper and other positively (to the global economy) correlated commodities experience anything from moderate downturns to outright mini-crashes while gold continues to rise in terms of many other assets. Where I have been incorrect thus far is in the continued relative strength in silver as well as the timing on a top in the broad stock market. But these are stories for another day. For now, I would like to look at the rally in the precious metals complex in terms of the miners vs. gold and the possible leverage implied in this relationship.

In the lower panel, we see how badly the miners (here is a list of the components that make up the GDM after which GDX is modeled) have underperformed the metal thus far in the halting and often frustrating rally from October, 2006. Given the implied cost reductions that producers would experience in an environment where gold outperforms most other commodities, it is important to watch the GDX-Gold ratio (and HUI-Gold, XAU-Gold, etc.) for signs of that famous leverage that gold miners are noted for which, when applicable can give investors and traders significant rewards in short time frames.

On the above chart, we see nominal GDX still technically in consolidation mode but nearing the top line which, if surmounted on a weekly chart would constitute a break out. This would attract attention to a sector that continues to fly under the radar as traders pile in looking for the next hot play. Those of us who have been patiently holding and waiting throughout this uninspiring rally would then be presented with ample selling opportunities, likely near or at new all time highs. But that is putting the cart before the horse. First we need the horse to kick down the door and get out of the barn.

The energy complex has been strong lately and certain industrial metals have clung to life while others have at least moderated their tanking. The gold miners' famous leverage would come into play in the event of continued economic moderation (slowing?) as massive commodity speculation is unwound. One important note however: A lot of last year's commodity bulls (hedge funds, etc.) were likely gold bulls as well. In fact they were bulls on virtually all asset markets this side of Timbuktu. So a downturn in the precious metals complex cannot be discounted in the short term in the face of liquidation in other markets. I believe oil is currently in a dead cat bounce with further to go on the downside. Oil and the industrial metals (see GYX-Gold ratio) remain in weekly down trends vs. the barbarous relic, gold. It would not be surprising if 2007 is the year that the gold miners finally exhibit the performance they showed early in the bull market where, during a climate of economic contraction they were about the only stellar performers on the planet. A break on the weekly chart and a shift to out-performance vs. the metal will be a strong clue.

As always, my tact will be an ongoing analysis with frequent checkups of the patient. I would likely plan to do some selling if this rally continues strongly into the spring, but I hold open the possibilities of selling nothing, selling down to the "core" holdings or selling out all positions. Of course this will depend on the sector fundamentals going forward.

Good luck, and if you are in a position of profit, congratulations! This has not been an easy rally from the git-go. But you know what they say. No pain, no...

Disclosure: Author owns both GDX and the gold bullion ETF, GLD along with smaller producers and near producers (AZK, MRB, MFN, RIC) along with larger miners (GFI, HL & HMY) and a few more speculative plays which will go unmentioned. The author also owns an account with BullionVault, which provides for the purchase of physical bullion in various currencies and storage options in Zurich, London or New York.

-- Posted Friday, 9 February 2007 | Digg This Article

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