Gold Miners Say ‘Not Yet’

Hey, gold mining buffs! How’s your appetite? For risk, I mean.

Gold prices spiked $7, or 0.6 percent, higher last week. Mining stocks fared better. WAY better. Some more “way” than others. Ordinarily, junior mining shares are most volatile, rising and falling to a greater degree than larger gold producers.

But last week, things went topsy-turvy. The VanEck Vectors Gold Miners ETF (NYSE Arca: GDX), a portfolio tracking more than four dozen of the majors, popped up by 3 percent, outpacing a 1.6 percent uptick in the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ). GDXJ amalgamates the performance of nearly six dozen mostly early-stage companies. Two-thirds of GDX companies are large- or mid-caps; nearly all GDXJ components are small- or micro-cap outfits.

Aggressive investors like the levered returns that juniors provide. You can see how juniors outperformed the majors back in 2010 while gold was still rising to record highs. The chart below illustrates investor enthusiasm for risk in the mining sector. It’s really nothing more than a ratio of GDXJ’s price to GDX’s, adjusted for stock splits. When investors’ risk appetite increases, GDXJ outdoes GDX. When investors pull in their horns, GDX does better, meaning it falls at a slower pace than GDXJ.

Major turns in risk appetite often telegraph shifts in the bullion market. You can see the downturn in the miners ratio in late 2010-early 2011 which telegraphed gold’s peak price three months later. The December 2015 bottom in gold prices was preceded by an upturn in risk appetite earlier in the spring.

Last week’s price action in gold and the miners wasn’t very bullish. It was anemic, really. That’s not to say that gold doesn’t have upside potential. It may very well break out of its long-term funk in the near future. For a breakout to be sustainable, though, people need to be hungry for change. What we saw last week was a muted appetite for risk.