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The Market's Measure
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Gold Miners Sending a Signal?

No doubt about it, it’s been a great year for gold. Basis the London morning fix, bullion’s climbed more than 25 percent to date. It’s been an even better year for gold mining stocks. The VanEck Vectors Gold Miners ETF (NYSE Arca: GDX), a 52-stock portfolio of large- and mid-cap producers, is up 96 percent while the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ), a tracker of 46 medium- to small-cap outfits, has soared a whopping 136 percent.

GDX tracks all the major players in the gold mining industry. GDXJ covers mining firms below GDX’s market-cap cutoff and, no surprise here, carries more market risk, reflected in its higher volatility and beta metrics.

Folks who buy GDXJ or its components are looking for more bang for their mining bucks, though on a risk-adjusted basis you could argue that junior mining stocks aren’t the better bargain. Juniors, simply put, are more speculative.

The relationship between GDXJ and GDX, in fact, can give you some insight into investors’ attitude toward gold. Just track the ratio of GDXJ’s price to that of GDX (adjusted for the junior miner fund’s 1-for-4 reverse split in 2013) and you’ll zero in on the sector’s speculative fervor.

From the chart below, you can see that the gold miners ratio has climbed 20 percent since the top of the year.

Click to Enlarge

But there’s something else worth noting. Look to the left on the chart and you’ll see how a 2010 top in the miners ratio presaged the break in gold’s price nine months later. Look to the right and you’ll see rounded bottoms in the ratio and in gold’s price. The bottom in the ratio anticipated the nadir in bullion’s cost by, again, nine months.

There’s a predictive quality to the ratio. When aggressive speculation ebbs and flows, so goes gold’s price. Later.

Now look further to the right on the chart. See the recent topping action in the miners ratio marked by the dashed line? It coincides with a congestion area in gold’s price, evidenced by another dashed line.

So here’s the question: Are we seeing evidence of a major shift in speculative interest or is this just noise?

A recent rebuild in gold’s contango indicates an underlying bullishness in the bullion market. But the miners ratio weekly chart shows toppiness (in its RSI oscillator, together with erosion in its MACD indicator, for those who care) on the stock side.

Is it possible that gold rises but miners fall off? Sure it’s possible. What’s probable is the better question. Probably, it’s a good time to lay low. Unless you’re a real speculator, of course.

Brad Zigler is'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.

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