The miners will typically lead gold at major turning points. We say typically because the trend in the relationship is hardly exact or precise. There can be times when the miners are simply showing their beta (not leading) and there can be times when the miners are leading but their leadership suddenly halts or reverses. The miners peaked five months before gold and are now one month from the 4-year anniversary of their market. The time seems ripe for the miners to lead gold into the next bull market.
In the chart below we plot (ARCA:GDX)/(ARCA:GLD), (ARCA:GDXJ)/GLD, (TO:XGD)/GLD and gold. With the exception of GDXJ/GLD, these ratios climbed strongly. More important is that the ratios have held near their recent highs while gold corrected nearly its entire advance in January. Gold lost roughly $100/oz and is threatening the $1100s again -- yet the miners have maintained most of their gains.
The relationship between the miners and gold threw us a major head fake last summer when the miners were trading near 12-month highs relative to gold and on the cusp of a major breakout. That potential head-and-shoulders breakout for GDX and GDXJ completely failed. Gold’s relative weakness proved to be a bad omen for the miners.
Why might things be different this time around?
The miners are far more oversold now compared to then. At present, the miners are just about four years into a bear market that's undoubtedly the second worst of the past 70 years. Last August the miners were eight months into a rally. If the bear had ended in December 2013, it would have only been slightly more than two and a half years old (versus four years now).
Two other things bode well for continued leadership from the miners. First, crude oil's collapse is a huge boon for mining companies. Energy can account for 25% -- sometimes as high as 30% -- of a miner’s costs. Second, foreign-currency weakness is a positive for some companies. Granted, that has to be examined on a case-by-case basis. If the gold price in USD is stable but foreign currencies such as the loonie lose value, then it is another benefit to the mining company, which pays its workers in loonies.
The fact that the bear market in miners began five months before the bear in gold and is now nearly four years old gives us reason to anticipate leadership from the miners in 2015. Macro developments in the energy and currency markets have catalyzed a better fundamental environment for miners and their potential to outperform gold.
In the scenario that gold makes a new low, GDX would have to decline 22% to test its daily low. Because of the stronger fundamentals for miners and the extreme long-term oversold condition, I don’t think miners would make a new low. That means the next leg higher could take miners into a new bull market.