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Is this the right time to invest in mining stocks?

Fiala Petr
Published: 13.6.2014 | Last modification: 19.6.2014 05:09  | Comments: none
Today I have analysed stocks in the mining sector, as I see clear accumulation of gold and silver shares during the last few days. I looked also at seasonal charts and positions of traders ( COT reports) to find out what is the probability that this sector is bottoming. Here are the results.

I am going to start with COT reports. Below is a chart showing price of SLV ( silver) and Net Short positions of Commercials  for silver and all metals in general ( gold + silver + platinum + palladium). Silver seems to me in better condition than gold, that is why I am showing silver.  Absolute values of the Net Short positions of Commercial Traders ( miners and processors) are shown in the middle panel, the upper panel contains  a relative values by means of a stochastic oscillator.

Chart 1: Net Short Commercials - we are at minimum again. That means that mining companies have only a low motivation to sell their products for these prices and are expecting their rise. On the other side processors would like to buy as much as possible for these prices and that is why SHORT minus LONG positions are so low right now. That means market imbalances on the market. As for the price of silver I would like to see a decline to the support of the lower trendline around $15. However that may not be necesarilly  the case as most of traders is waiting for this to happen. The overall situation is now favorable for  metals. You can notice similar situations in the past that are highlighted with red lines in the chart.




Chart 2: A typical seasonal bottom for gold and silver keeps occuring on June 26. It is now 14 days to this date. You can see how exactly were the last price bottoms in line with the seasonal curve. A keep saying already a long time that creators of various algorithmic models implement seasonality in their models very often. That is the reason why it works so good.  Thus traders are probably moving some part of their money to the metals and gold stocks - if I can   presume this from  the accumulation of the last ten days.


Chart 3: There are a few seasonal lines in this chart. They all show a typical price development of mining stocks from June 1.  Seasonal chart of ABX represents a majority of gold stocks, as this curve ( orange colour)  is similar to the curve of NEM ( two largest mining companies). However as you can see from the other seasonal curves, silver mining stocks have their typical bottom earlier - on June 24 .  That is why i think that we may be at the bottom with stocks as EXK, PAAS, HL, SLW or GG.



I have prepared still one seasonal chart. It shows a typical development from the typical autumn or summer price peak of ABX. I  have choosen ABX because of its  long history that the ETF GDX does not have.


Chart 4: A seasonality of the ABX stock from the peaks . You can see that the current decline from the August 2013 peak is longer than medium-term waves down used to be in the past.



Chart 5: Weekly market breadth indicators for the mining sector. I think that these indicators are relatively positive and it may be a time for looking for a bottom.


Summary

These are my favorites: EXK, PAAS, HL, SLW, GG.  All of them are showing a considerable strenght right now. However it is not  a final  list, there are probably other good-looking stocks. I would not chase these candidates as the downtrend of the past few months and years is not overcome yet. I would wait for another dip. 


Petr Fiala


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