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Saturday, July 6, 2013

Chart of the Week - Mining Share Money Flows (Spec Bias)

Thursday, July 04, 2013

The chart below compares the AMEX Gold Bugs Index (HUI) with the price of gold since 1998 to arrive at a simple ratio.  In simple terms it is the HUI expressed as a percentage of the gold price. 
The chart is helpful when we think about whether money flow is positive or negative for the mining sector.  As capital flows into the sector we expect to see the ratio rising and vice versa.

What are some of the signals this chart tells us? 
Since early 2011 clearly money flow has been relentlessly negative for the miners as a group. 
Periods of heavy negative money flow have been followed by periods of the opposite (2001, 2005, 2009).
Reversals of negative money flow can be violent (2001, 2005, 2008-9).  Remember this is a ratio of mining shares to the nominal gold price, so it takes a good deal of buying pressure for mining shares to move the ratio higher in a rising gold price environment (such as in 2001-2003, 2004-2005, 2009).
The current condition is very near the lowest readings on the chart and therefore can be considered extended.
Mining shares expressed as a percentage of the gold price are within a few percentage points of important, probably all time lows.
The HUI:Gold ratio may be a good indicator for when the market for mining shares is near a major long term turning point. See the chart of the HUI itself below and compare. 

We have to look back to the turn of the century to find a time when gold mining shares, as a group, have been so shunned by the collective market. 
For contrarians this is an interesting period and a time to be selectively building longer term positions in the large cap miners. 
That is if one believes that the price of gold will not return to the level indicated by the out-of-proportion (to the gold price) exodus of capital from the sector.
The current speculator bias continues to be negative and arrogantly so for mining shares.  One of the reasons changes in money flow are sometimes violent is that short covering (in size) often makes up the first leg of a major reversal.   
Capitulation can only be confirmed after the fact.  Notice, please, that important bottoms in both charts take on a “V” shape.  Whether the exodus was caused by panic or by “hatred” seems to be irrelevant.  When the market decides it no longer hates the miners it loves them. 
In our opinion the market has very strongly over sold mining shares to the point of hatred of the entire sector.  We all know what follows hatred in the ongoing love-hate-love-hate relationship of the markets…  Hate today will be love soon and for some time to come.