Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Last week we wrote:
“Technically, the gold stocks continue to follow a typical post-bottom rebound path and look very strong. The daily RSI of GDX is at a 10-month high as GDX consolidates around $30. We’d love to see GDX consolidate for a few weeks but it may break above $31 within days.” On Monday and Tuesday GDX traded up to $31 but failed to close above it. Tuesday we saw a nasty bearish reversal which confirms that GDX over the very short-term will correct and consolidate its gains. This is good news as it will alleviate the overbought condition and put the market in position to launch a sustainable breakout around the end of September.
In the chart below we plot GDX (large miners), ZJG (Canadian mid-tiers) and SIL (silver stocks). In previous writings we’ve noted the importance of the 50-day moving average in the formation of bottoms. We’ve said that the test of a rising 50-day moving average confirms the bottom and provides a buying opportunity. As of a few days ago, precious metals shares were trading well above their 50-dma’s. Many stocks were up 50% from the August low in only ten trading days. Thus, it only makes sense that these markets digest those gains and test support.
GDX closed Wednesday at $28.30 while its 50-dma is at $26.19 and rising. ZJG closed at $9.09. Support is at $8.50 and ZJG’s 50-dma is at $7.91 and rising sharply. ZIL closed at $15.46 and has support at $14. Its 50-dma is at $13.19 and rising sharply.
The HUI (essentially a GDX with less holdings) remains well in-line with our projected recovery. The projection is the amalgamation of four recoveries (1970, 1976, 2000, 2008) starting from the current bottom. The HUI is in blue while the projection is in red.
Below is a chart of the four recoveries (1970, 1976, 2000, 2008) along with the current recovery (in black). Again, the current rebound is well in-line with history.
The bottom line is the current correction or consolidation is quite healthy for the sector. Many stocks have made huge runs in a very short period of time and are set to digest those gains and correct short-term overbought conditions. Be patient over the coming days and weeks and use the 50-dma as a guide for support and potential lows. Further weakness in the coming days and weeks could be the last chance to get in at low prices before this sector moves quite a bit higher. Our work leads us to believe there is a high probability of big gains in the fall.
