Funda-Metals

Written by Goldfinger

What is driving the metals market now?  I have pointed out in a recent article, Has Gold Lost It’s Way, that gold and the metals stocks have a close correlation with the overall market at the moment.  Although there is a varying state of decline, GDX (Market Vectors Gold Miners ETF), GLD (SPDR Gold Trust ETF), SIL (Global X Silver Miners ETF), SLV (iShares Silver Trust ETF), DJI (Dow Jones Industrials Average),  IXIC (Nasdaq), GSPC (S & P 500), are all down in the last month with low trading volume.  The summer gloom days and geo-political problems will most likely help this trend continue for a while.

Yahoo chart for April 18, 2012.

You can see in the chart below the volume for GLD is over one third off the 3 month average.  The same holds true for iShares Silver Trust ETF which averages over 19 million shares per day for the last 3 months, but only around 8-11 million the last few days.   The metals market seems to be going to sleep.

The CME Group reduced margin requirements on silver futures contracts by 12 1/2% effective after closing April 16th.  Maybe this will help wake up the silver market.  CME officials raised margin requirements a few times last year to cool off a hot silver market.

In news from across the ocean, Vietnam added new regulations:

“HANOI, April 11 (Xinhua) — The Vietnamese government recently issued Decree No. 24, which will be valid from May 25, under which the government would assert a monopoly over gold bar production as well as import and export of gold.”  “These strict rules will shut down many gold shops around the country.”

And India is rethinking their tax ideas on gold.  The bullion traders and jewelers had started a 21 day strike.  India is the world’s largest gold consumer, so putting the damper on physical gold demand affects the gold market globally in a negative way.   This is from the Indian Express.

“Jeweller associations held meetings with Mukherjee and Congress President Sonia Gandhi over a series of tax proposals in the Budget 2012-13 on gold imports and jewellery. Besides proposing to double the customs duty on gold to 4 per cent, the Budget proposed to impose excise duty of 1 per cent on unbranded gold jewellery. It also sought to collect tax at source on sale of jewellery worth Rs 2 lakh or more.”

There is not much driving anything at the moment.  Apathy and fear have slowed trading.  Cash is king, but lack of interest usually means we are close to a bottom.  However, just because we might be close to a bottom doesn’t mean it will take off right away.  I expect this downward, sideways trend to continue for a while unless there is a black swan event, or QE3 happens.  Speculation should pick up as many savy investors love to buy the metals during the summer months at a nice discount.

The metals have been leading mining equities the last 2 years, but I expect that to change on the next leg up.  There have been many reasons for the stocks to lag.  Many new regulations, laws, increased energy costs,  and restrictions have taken their toll, but they (mining stocks) have been so beat up that they are a bargain now.  Some of my favorite metal stocks are down around 20% in the last 6 months and the overall P/E  ratio of the HUI is at 15 (blue line on chart below).  That is close to fair value.

According to Allstocks.com,

“when the spread is at fair value, where it “should” be, there is no theoretical advantage to owning the futures instead of the cash, or vice versa. To professional investors and the big institutions, when the spread is at fair value, it makes no economic difference to them whether they own the futures or the actual stocks.”

Hat tip to an April 9th Seeking Alpha article by Katchum for the chart.

Here are some of the P/E ratios for metals stocks.

ABX Barrick Gold 9.1

AG First Majestic Silver Corp. 16.2

AUY Yamana Gold Inc. 19.5

EGO Eldorado Gold Corp. 24.5

GG Gold Corp. 18.7

HL Hecla Mining Co. 8.1

IAG Iamgold Corp. 5.9

KGC Kinross Gold 9.4

NGD New Gold Inc. 25.0

SLW Silver Wheaton Corp. 19.0

SSRI Silver Standard Resources 13.6

Some of these look very good for appreciation.