The stock market is not in a great shape lately. Even with the recent sell off, the broad indices are trading less than 10% below their all-time highs, which means they are not even in a correction (technically speaking).
There is one segment in the stock market, however, that is a true exception: gold miners. They have truly been slaughtered since they peaked in 2012, the year the huge bull market in the rest of the stock market started.
Let us take a look at the big picture, i.e. the secular trend. The first chart is the HUI, the gold mining index, since 1996. The HUI gold mining index has collapsed from 650 points to 106 today, a decline of 83% ! Talking about a sell off.
The index is right now trading at the one but last support line, which coincides with support after the first big rally of 2001/2002, after the secular lows in 2000 were hit.
If this support area gives away, we would not be surprised to see a decline towards the 2000 lows.
However, there is a probability that gold miners will stop declining, which would imply they would be setting a higher low from a secular point of view. That would imply a mega BUY signal.
How high is that probability? We would say that chances are very high. Our rationale is based on the miners to gold price ratio. In other words, what is the value of gold miners expressed in ounces of gold. That viewpoint reveals a different picture, as seen on the next chart.
The HUI to Gold ratio has already established a lower low. In other words, the value of the gold miners, expressed in the product they are producing, is cheaper it has been in several decades.
The gold mining industry is hit by the worst crisis in many decades. That results in a secular imbalance, which, at some point, has to be restored.
Now here is the good news for gold bulls. This deep crisis has resulted in a ‘clean sheet’ in the industry. Mining companies have laid off staff, they have shut down unproductive mines, they have cut salaries and bonuses of their management teams. On top of that, they are benefiting now from lower energy costs, as crude oil, one of the biggest costs for miners, has collapsed with more than 50% since last summer.
Those developments will start manifesting themselves in the financial results of the miners. We expect to start seeing better results than in the last years, even as of the next quarters. And THAT is the critical factor for a trend reversal in the gold mining business.
Now if that trend reversal would take place on a higher point than the 2000 lows, than we have a technical confirmation of a ‘higher low’ chart formation, which is strongly bullish.
We will know over the course of the coming months, and will update readers accordingly.