Mining stocks' signal - the hidden gem
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Junior mining stocks have been very strong recently, also relative to senior miners. What does it mean?
It means it's story time.
The Tale of Junior Mining Stocks
The protagonist in this story is a multi-faced indicator. When we see it, we know that something's up, but we don't know what. It seems chaotic, unclear, and perhaps irrelevant, but dismissing something just because it isn't obvious at first sight is making the same mistake that the Spaniards “discovering” Americas made – they were looking for silver (“la plata”), and when they found something similar that was not silver, they were just throwing it away, disappointed. They even called it little silver – “la platina”… Yes, that was platinum.
Sometimes, it's worth digging deeper in order to find the hidden gems.
The gem that I'm going to show you comes from one of the precious metals ratios that doesn't get the attention it deserves.
You see, mining stocks are not alike. There are no two identical companies, of course, but that's not what I mean.
The senior mining producers, already produce and sell precious metals, so they generate revenues. However, junior mining companies are not producing and selling yet. They have properties at different stages of development, but in general, there's no revenue.
The value of the senior producers can be best by estimating free cash flows to the company, discounting them to the net present value, and so on. Or through the price-to-earnings values.
This is not really the case with juniors, where a lot of their value depends on… Well, hope. Estimates, assessments, belief in the quality of current and future decisions, and so on.
These two parts of the mining stock sector are similar in some ways but very different in other ways.
The basis is the same – they are proxies for the prices of metals that they either sell or expect to sell in the future. And yet, due to the above-mentioned differences, they will behave differently.
In particular, they will behave differently when the market goes through different emotional stages because there is a different level of “trust” needed to confidently invest in something that provides revenue and in something that doesn't. The confidence levels will change not only based on what is really happening but also on how it's perceived.
Therefore, comparing the performance of junior mining stocks and senior miners might give us special insights into the emotional stage of the precious metals market that is not visible otherwise.
There is also another factor at play here. Namely, the link between junior miners and stocks is stronger than the one between seniors and stocks. This is quite normal, given that seniors have revenues to back up their valuations, while juniors depend more on the market mood.
The first kind of link is what is currently providing us with a major indication. Like, a really, really major one.
The ratio itself might not appear to be doing anything special, but when you look at the RSI indicator based on it (in the upper part of the chart), it becomes clear that we saw something profound. In fact, this might be the key event that happened this year in mining stocks.
Mining Stocks at Crossroads
The thing is that the RSI indicator just moved visibly above 70, which happens very rarely. It happened once last year, once in 2021, and it happened once (so far) this year.
Can you now see the importance thereof? We only saw this indication a couple of times in recent years, and in most of those cases, it corresponded to key tops in gold and oftentimes also in stocks.
This is huge, especially for those investing in junior mining stocks. This is a major warning of medium-term importance – its implications can play out over the course of months, not just weeks or days.
As I wrote earlier, junior gold miners are linked not only to the price of gold but also to the prices of stocks. And if we have just seen major tops in both markets… We're likely to see a massive slide in the junior mining stocks in the following weeks and months.
Of course, no market moves up or down in a straight line, and there will be rallies along the way (like the one that we caught and profited on this week – buying at $33.26), but the next huge move is likely to the downside.
There will be chances to make more money on the corrections, but the key trend at this time is down. And the above little-known ratio is only one of the important factors supporting this outlook.