Trader Dan explains why I am not in the miners and have not been so since the 2008 crash. The miners were lagging going into the crash and then got obliterated. Since then gold has gone on and fully recovered to new highs while the shares again have underperformed. I think this paradigm is set and will be with us for the duration with periods of out-performance offset by severe under-performance. I also believe the miners will be nationalized when gold becomes the world’s primary reserve asset again. I will only buy bullion now or trade options on ETFs. The options give me leverage for speculative trades.
I do not need to point out to the readers the abysmal performance of the mining shares. The hedge fund ratio spread trade has destroyed their share value and most of management seems unwilling or incapable of fighting back to protect the interest of their shareholders.
The Gold and Silver ETF’s are also partly to blame in that these Trojan Horses have siphoned off a huge amount of speculative money flows that otherwise would have found its way into the mining sector shares. Those products can be used to obtain LEVERAGED exposure to the precious metals without the risk normally associated with outright purchase of a particular mining company. That makes them attractive to hedge funds which can also use them as the long leg of a spread against a short leg in whatever company they have decided that they can target.
Paying out a dividend to shareholders might put a dent in this little game being played by the gold and silver share shorts as it currently costs them nothing to LATHER, RINSE and REPEAT this strategy. If something works for a money making trade, it will continue just as long as it keeps on working. That means they can short the shares at will since they have no opposition. Shareholders may bitch and complain about it, but as long as the status quo continues, the shares will lag the price of bullion.
The non-stop selling barrage has brought the HUI down into a critically significant technical support level near 492-490. This level must hold or if broken, must be recaptured by the close of trading Friday, to prevent a further drop lower.
At this point in time, the only thing that I can see which will lead to the shares outperforming bullion would be another round of monetary stimulus from the Fed. In such an environment, the share prices will outperform the metals initially with silver outperforming gold as well. Will we get one? I do not know but if the stock market continues to slide and the economic data numbers do not improve, I bet we will, impact on the US Dollar notwithstanding.