Mining stocks – Still on the runway

Six months ago I wrote that the gold mining stocks were on the runway and ready for take-off. I expected the gold mining stocks from that point to start outperforming gold bullion itself. Since then, however, little has happened.

I use the rate-of-change (ROC) in the price of the XAU Mining Index compared to the gold price to show their relative performance. Their ROC has moved sideways for six months, as can be seen in the following chart.

Note the green line on the above chart. When writing six months ago, I didn’t expect that a “runway” would literally be formed. But there it is, and it stands in stark contrast to the six other reversal points on this chart.

This chart clearly illustrates how sharp those previous reversal points were; they all happened quickly. But not this time around. What does it mean?

I’m not sure if this break from past patterns is significant. But from a purely technical point of view, it is possible that the last six months of sideways movement is in fact a consolidation pattern. If so, that pattern would indicate that the XAU will continue underperforming gold bullion, if the green line eventually gives way as a result of the ROC moving lower. In that case, the ROC could perhaps even move to the same -47.4% level reached at point #5 in October 2008, marking an historic level of underperformance. That is not a cheerful prospect, but if it occurs, that event would create a double-bottom in an area of extreme undervaluation in the mining stocks compared to gold bullion itself.

The bullish view is that the “runway” being formed does not matter, which is how I see it. To me the significant development is the improving cash-flow some of the major mining companies are generating, with dividend increases as a result.

Given that I expect gold to keep climbing higher in its long-term bull market, I continue to view the mining stocks to be significantly undervalued. And maybe – just maybe – the prices of gold mining stocks are finally ready to take off from that runway and start climbing more rapidly than gold.