Gold’s enjoying a bit of a bounce now. That is, if you consider the slowing of a price skid through $1,200 a bounce. Despite a strong U.S. dollar, there’s been a bit of safe haven bullion buying lately and that’s caught the attention of mining stock enthusiasts. Some are breathlessly talking up a resurgence in gold shares.
Nothing new there. Perma-bulls have long been predicting a rebound only to be sorely disappointed by investor disfavor. Punters, it seems, have preferred holding gold or gold ETFs over mining stocks for the past four years. For evidence of that, take a look at the relative strength of gold mining share indexes to bullion in Chart 1.
The downtrend in miners’ value – revenue producers and exploration companies alike — is obvious. Miners have, you should forgive the pun, fallen down a deep shaft. But it’s that little bounce at the bottom that gives bulls hope. Is the worst finally in the rear view mirror?
Maybe. Lower energy prices certainly make it cheaper to mine gold. Several companies, in fact, are capitalizing on the downturn in fuel prices to expand their operations. Bloomberg Businessweek reports nearly $3 billion in gold mining deals since the top of the year.
Stablization in gold’s price would be a windfall for mining shares. According to Paula Bujia, Gold and Precious Metals Fund Manager for London-based Schroders plc, investors need to warm to bullion before miners can really take off.
“We think that the main catalyst is investor confidence that the gold price has bottomed,” says Bujia. “With a stable gold price, we think gold producers can outperform.”
It’s the juniors, the exploration and development companies, that represent the leading edge of investors’ appetite for gold. You can track this enthusiasm by comparing the price of the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) to that of the Market Vectors Gold Miners ETF (NYSE Arca: GDX). Spikes in gold investor risk appetite are reflected in GDXJ gains relative to GDX. As you can see in Chart 2, investors’ taste for risky gold investments has been waning since 2011.
An ascending triangle – usually a bullish pattern – broke down in late 2014. The subsequent decline in investors’ risk appetite may, indeed, have run its course, but it’s really too early to tell. There’s a lot more bottoming action in the ratio needed to confirm a turnaround in miners’ fortunes. So take a breath. There’s still time to take a stance.
Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.