Last week saw the junior gold miners continue their downward trend despite gold prices demonstrating further gains in the metals space. The yellow metal continues to hover around the US$1,500 per ounce level for almost six weeks, with some volatility during this period that saw prices rise and fall briefly to US$1,535 and US$1,471 per ounce, respectively.
The stable trend in the price of gold and gold stocks comes after several concerning geopolitical events. The escalating trade war between the U.S. and China and growing tensions in the Middle East are creating opportunities for gold producers who continue to register marked gains. The S&P Global Gold Index has gained 36% since May, although the Junior Mining sector is yet to feel the positive effect. To date, the performance of the S&P/TSX Venture Index, which is comprised of 53% mining, has fallen almost 11% since May.
It was only in the past few weeks that investors started to cautiously turn to gold shares but remain weary of junior miners as they wait to see if the surging gold price is sustainable for the medium- to long-term. For the time being, both the junior mining sector and precious and base metal commodities continue their downward trend despite some brief periods of optimism.
The HUI to gold ratio is a good way to measure gold stocks’ relative performance to gold. And this ratio is once again in the decline mode after a rather sharp counter-trend move. This comes after a recent upswing, which was seen by some as a counter-trend move, but its failure to break above the declining resistance line meant it did not mark the start of a beginning of a new trend. The current small move lower in the ratio is the very early part of the price move right after the breakout was invalidated.
However, there are reasons for optimism. In the past month, the gold price increased 10%, reaching a multi-year high of US$1,552 per ounce in early September before settling around the US$1,500 price level, currently sitting at US$1,505 per ounce. At the same time, except for nickel which has risen 40% since May, base metal prices remain depressed. The general trend is that commodities perform well when the Dollar is weakening, and inflation expectations are rising. Confirming this, the Dollar index has been in an uptrend since mid-2018. As a whole, gold and palladium have been the few commodities that have trended higher in this environment.
As the junior mining sector continues to struggle with the loss of momentum, the number of financings by junior and intermediate companies rose to 195 in September from 181 in August. However, the total amount raised was down by 63% to US$466 million from US$1.03 billion, a 7-month low. The first three quarters of 2019 paints a similar picture, with the total value raised from financings in all commodities down 22% to US$6.19 billion compared to the same period in 2018. The total value of financings for gold companies during the first three quarters of 2019 was only marginally higher ($2.78 billion) than the same period last year ($2.71 billion), despite the 13% rise in the price of gold over the same period.
The observed downtrend of the TSX Venture Index is not an immediate-term or even a short-term sign but it sends a huge warning to the gold, silver, and gold mining stock investors. It remains to be seen whether the sector-wide decline will continue in the following months but for now it is clear that the earnings landscape for junior miners has already deteriorated and will likely get worse before it starts turning around.
Focusing on what we have been observing in the past months is important, especially for beginning gold traders. Keeping the context in mind is absolutely critical if one wants to make serious gains in this – or, in fact, any other – market.