How Gold Miners Are Worse than Gold

  • Posted by on October 31st, 2014 at 7:34 am

miner


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People go crazy over Gold. It is a bit of an odd thing when you think about it. Any investor that looks at fundamentals has no reason to look at Gold. It does not have earnings or sales or pay a dividend. Technical traders and investors are only interested when the price is trending or at a key level where a reversal might happen. It is the macro traders (and those that claim to to be macro traders) that play the biggest role and have the loudest voice in Gold. And most of them are crazy. Some equity traders try to understand Gold so that they can better evaluate the Gold Miner stocks. These traders are crazy as well, but not nearly as messed up as the Gold traders. That is the landscape, or at least how I see it. A bunch of crazy motherf$#kers trading Gold and some that want to be trading Gold Miners.

If you are one of these two then there are some things you need to understand about the relationship between Gold and Gold Miners. It is all contained in the chart below. Yes, the crazy Gold traders and crazy wanna be Gold Miner traders need to understand what the lunatics that draw lines on charts (read: me) have to say.

gdx-gld

So the lunatics can point out that there does appear to be a historical relationship between the Miners and Gold. The chart above shows the weekly price action of the ratio of the Gold Miners Index to the price of Gold. in the background in the Gold color is an area chart of the price of Gold itself.

So what does it say? A=in a few words, the Miner stock prices lead the price of Gold lower. The Miners start to fall before the price of Gold does. The easiest place to see this is period from 2012 to 2014, where the ratio was falling while the price of gold was pretty stable. Second, for the most part, as Gold prices rise, the Miners follow suit. This is most evident from 2010 to 2012 when the price of Gold was rising and the ratio was pretty flat.

The two move together to the upside, but Miners lead to the downside. If you are crazy trader, crazy wannabee or just a lunatic chartist, keep these rules in mind.

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