The recent performance of junior stock mining companies

This week we had a very powerful rebound on the precious metals market. Although this is a very strong rally, it is doubtful that it will take us straight to new highs without taking a pause. Entering a consolidation phase is not out of the question. We warned our registered Users that the upswing will most likely be as dramatic as the preceding decline. Moreover we sent out an alert on September 10-th in which we advocated making additional purchases as we thought the bottoming process was complete.

In this essay we would like to put current events into a long term perspective and verify whether the junior sector is acting within the historical norms or not. A serious anomaly should make us, the junior stock mining investors, alert. If we concluded that this powerful decline could have been somehow expected and perhaps something similar already happened, then we should not get too frightened.

The chart below illustrates the relative performance of the junior sector, HUI Index and gold itself. For more information about the way we calculated the SP Junior Index please see the essay entitled Juniors - Performance and Timing.

The data does all the way back to the first years of this bull market, so it should be enough to spot anything unordinary. The last downswing is substantial, but as you may see on the chart, it was preceded by a period when it outperformed HUI to a considerable extent. The top was formed earlier than it was the case with senior PM stocks and was due for a correction even without falling prices of gold and silver. Please take a look at the performance of the junior sector in 2004. After several months, a strong outperformance was followed by a decline that was more severe in this sector than it was the case with the HUI Index. The same can be said about the recent developments in the precious metals market.

To better show you how does the performance of both sectors compare, we created a junior/senior ratio.

This ratio shows exactly what we have written about in the previous paragraph. Juniors tend to outperform the big precious metals producers and after some time they need to take a pause, which seems to be taking place right now. Back in 2006 this proved to be a great buying opportunity.

Apart from relative under/overvaluation of juniors with regard to the HUI Index, there is one more thing that needs to be taken into account. As we concluded in the previously mentioned essay, the junior/senior ratio is reasonably correlated with the general stock market. This is another thing that justifies the severity of this decline. As the stock market fell, the junior/senior ratio plunged as well. The marked rectangles on the chart are periods where juniors rallied relative to the HUI Index – it was accompanied by a rise in the general stock market. The question is what will happen next on the main stock indices.

It seems that the powers that be will do anything to prevent the financial system from falling further (a Friend of mine (hi Peter) even joked that they will make each citizen use 2% of his/her income to purchase shares of a bank of their choice) and this should put a significant upward pressure on equities in general. This is a very good news for investors who own junior mining stocks.

Summing up, taking into account the aforementioned factors, the current decline in the junior sector seems to be justified and quite normal. The perfect time to sell juniors is after a long upward move, where euphoria and greed are ubiquitous. It does not seem that we are there today.

Of course the market might prove us wrong, as nobody can be right 100% of the time. Should our view on the market situation change substantially, we will send an update to our registered Users along with suggestions on how to take advantage of it. Register today to make sure you won’t miss this free, but valuable information. You’ll also gain access to our Tools section. Registration is free and you may unregister anytime.