The miners will typically lead Gold at major turning points. We say typically
because the trend in the relationship is hardly exact or precise. There can
be times when the miners are simply showing their beta (not leading) and there
can be times when the miners are leading but their leadership suddenly halts
or reverses. The miners peaked five months before Gold and are now one month
from the 4-year anniversary of their market. The time seems ripe for the miners
to lead Gold into the next bull market.
In the chart below we plot GDX/GLD, GDXJ/GLD, XGD.to/GLD and Gold. With the
exception of GDXJ/GLD, these ratios climbed strongly. Of more important is
that the ratios have held near their recent highs while Gold corrected nearly
its entire advance in January. Gold lost roughly $100/oz and is threatening
the $1100s again yet the miners have maintained most of their gains.
The relationship between the miners and Gold threw us a major head fake last
summer. The miners were trading near 12-month highs relative to Gold and on
the cusp of a major breakout. That potential head and shoulders breakout for
GDX and GDXJ completely failed. Gold's relative weakness proved to be a bad
omen for the miners.
Why might things be different this time around?
The miners are far more oversold now compared to then. At present the miners
are just about four years into a bear market that is undoubtedly the second
worst of the past 70 years. Last August the miners were eight months into a
rally. If the bear had ended in December 2013 then it would have only been
slightly more than two and a half years old (versus four years now).
Two other things bode well for continued leadership from the miners. First,
the collapse in Oil is a huge boon for mining companies. Energy can account
for 25% or even as high as 30% of a miner's costs. Second, foreign currency
weakness is positive for some companies. This has to be examined on a case
by case basis. If the Gold price in US$ is stable but foreign currencies such
as the loonie lose value then it is another benefit to the mining company (that
pays its workers in loonies).
The fact that the bear market in miners began five months before the bear
in Gold and is nearly four years old gives us reason to anticipate leadership
from the miners in 2015. Macro developments in the energy and currency markets
have catalyzed a better fundamental environment for miners and their potential
to outperform Gold. In the scenario that Gold makes a new low, GDX would have
to decline 22% to test its daily low. Because of the stronger fundamentals
for miners and the extreme long-term oversold condition, I don't think miners
would make a new low. That means the next leg higher could take miners into
a new bull market.
Good Luck!