Gold and Silver Miners are Surging

Economic Backdrop

The precious metals miners took a beating when COVID first reared its ugly head in the US in March. News of mine closures and restrictive measures throughout the mining supply chain, not to mention a disastrous fall in travel, had adversely affected mining operations. Falling asset prices, which had also spread into the precious metals sector, did not help margins for the miners who could still operate in the constrained economy.

However, the rising precious metals prices since March have buoyed the mining sector, which have begun to see sharp upward ticks across many popular mining funds. We will look at several of them to get an idea of the returns investors have had over the last couple of months.

Gold Miners

The Gold Bugs Index (HUI) has recovered nicely since March, exhibiting a 2x gain from the March bottom. In addition, the index formed a bullish cup pattern over the month of June, which is indicating building momentum for another upside move.

Moving over to the VanEck Gold Miners (GDX) index, we see a very similar 2x+ move up with a bullish cup pattern forming over the month of June. It as if the gold investor market is anticipating another run up amid increasing concerns over a second wave of COVID infection breakout in the US.

The iShares MSCI Global Gold Miners ETF (RING) has the same pattern as the previous two indexes, wouldn't you know it. One would begin to think that these funds are all seeing the exact same investment pattern emerging. We will discuss causes for that pattern more in detail further along in the article.

The exact same pattern has emerged in the Sprott Gold Miners ETF (SGDM), a 2x recovery since mid-March with a bullish cup pattern formed over June. Again, this miner index looks poised for a breakout to the upside if the fundamental economic news in the US proceeds to get worse.

Gold Juniors

The pattern in the gold juniors is very similar, except that the launch higher since March was more pronounced than in the other funds. We can see that the juniors experienced a 2.5x gain from 20 to about 50, and formed the bullish cup pattern, but with a gentler and more rapid slope.

Here is the VanEck Vectors Junior Gold Miner Index (GDXJ). This indicates more upside momentum with less hesitation by junior gold mining investors who were piling into the various junior gold stocks.

Silver

Silver is the more volatile of the precious metals from a price perspective. While gold tends to move in comparatively gentle movements, silver's chart often exhibits more violent price movement tendencies. This is largely in part to silver's industrial usages, where price movements reflect the futures market expectations of oncoming supply and demand.

But, many investors still see silver as a monetary metal, and when gold moves steadily to the upside like it has since Q4 of 2018, silver tends to follow in the same direction. Given the gold silver ratio being near all-time highs, many precious metals investors feel as though silver has much more room to run to the upside to bring that ratio back down to historic norms.

Here we will look at the Global X Silver Miners ETF (SIL) and we see that it experienced about a 2.3x move to the upside. The fund had a very shallow cup formation in June, but investors are clearly anticipating larger moves in silver to address that abnormal high in the gold silver ratio.

The silver junior mining chart is similar, but you can clearly see more volatility in the silver juniors than in the majors. Looking at the PureFunds ISE Junior Silver Index (SILJ), we see a similar 2.4x move to the upside with a shallow cup formation in June.

However, the index has just recovered to previous highs from December. The price action is also more volatile than in the majors, with a sharper downside correction in March and recovery in April through June.

Moving average indicators also show a weaker recover of the 50 day over the 200 day, indicating there is a bit more skepticism in the staying power of the silver junior miners than there is in the majors.

Final Thoughts

Gold and silver prices heading higher are not to be unexpected given the deflation in the world economy due to COVID concerns, and the shutdowns in various local economies. Both precious metals are living up to their reputations as stores of value and safety valves as the global economy lets off some of its steam.

I believe the charts are following the confidence of the markets in the COVID economy. The drop in mining equities was likely due to liquidations and fear from an unknown adversary in the virus. The gains in the indexes, resultant from increased investment into physical precious metals and their associated funds, has pushed the miners higher as more of the supply chain begins to reopen.

Conflicting US economic data will continue to support the bullish precious metals equity charts. While June saw 4.8 million jobs created, we also have a record number of unemployed and reports of 25,000 retail closures along with a potential for 85% of independent restaurants to remain permanently closed.

The damage being done to the economy now is weakening the structure available for a recovery. Despite the encouraging jobs numbers, it is a drop in the bucket compared to the losses. Given all time highs in sovereign and corporate debt, it does not appear we are anywhere near out of the woods as we battle the effects of a virus-ravaged economy.

Therefore, it would not surprise to see the precious metals equities continue to run to the upside. In fact, it should be expected until some serious changes in economic fundamentals begins to occur. It is not looking promising that this recovery will occur in the near future.