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Buy & Sell Near Extreme's - Miners?

We like to buy (plant seeds) into a market near the extreme lows, and sell (harvest the crop) out of the market near extreme highs.  But the obvious question is, “what is considered ‘low’ and what is considered ‘high’”?  We do not know the day a market will start to trend in a new direction but we hunt for apparent extremes in one direction or another in order to take new positions or to take profits.

We are much less interested in one day chart, ten day, or one year charts and much more interested in the big picture, large cyclical moves.  This next image illustrates how unhelpful a short-term, five day chart is to someone trying to buy for a period longer than a day. 

Chart 1.jpg

The above chart does not give us much insight to the next long term trend.  On the flip side, the next image tells us a lot about the value of a position held for several years.

Chart 2.jpg

In the above chart we can see that the mining stocks, when compared to the Dow Jones index, are nearly as cheap as they were back in 2001.  That means that compared to stocks, the mining equities are priced nearly as low as they were back at the start of the bull market.  Does this mean the mining shares will explode higher in the next handful of days?  Again, that kind of short term thinking is not our goal Instead, our goal is to decide if this market is relatively undervalued in order to help us determine if we should “plant seeds” for a future favorable move higher.

So how do the mining equities compare to the price of the metal Silver?  
Chart 3.jpg

The above daily chart illustrates the ratio of the mining equities compared to the price of silver.  As we can see, the value of the mining equities has been dropping relative to the price of the metal itself.  The red lines illustrate a falling wedge.  This setup will be interesting to watch over the coming months.

The next chart gives us a slightly larger perspective:
Chart 4.jpg

The above chart illustrates the same wedge that we highlighted in the previous chart.  The blue lines in this longer term chart illustrate a potential long term trend channel.  We can see that the price currently rests between the wedge and against the lower support of the trend channel.  When we look at this long term perspective, since 1984, we can see that the miners have never been this undervalued relative to silver.  If the XAU had more data we would like to see even more history but that is not an option in this case.   

For the miners, silver ratio to rise, the price of silver must drop relative to the miners or the miners must increase in price quicker than silver.  Either of those two scenarios would cause the ratio to rise.  Considering that the world still requires metals like silver and the fact that silver mining companies are not making very much money at current prices, we think that in the big picture, the price of silver and silver miners may be nearing a low.  Note that we did not say “at” a low but instead we said “may be nearing” a low.  The reason we word things this way is because we do not pretend to “know” the exact turning points but instead we try to “Plant Seeds Near Extreme Lows.” 

Michael Kilbach
President / Editor



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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