"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, April 16, 2011

GDX (majors) versus GDXJ (juniors) Ratio Chart


I misinterpreted my own chart when putting together this article and drew an erroneous conclusion. The ratio of GDX to GDXJ indicates whether or not the large caps are outperforming or underperforming the small and mid sized caps (juniors and mid tiers) in general. If this line is falling, it means that the large cap miners are UNDERPERFORMING against the juniors and mid tiers as a general rule of thumb, not as I originally stated in this article below.

I generally field emails from those who are rightly disappointed about the overall performance of some of their gold and silver shares. In nearly every case, the shares that they mention are juniors. That set my mind in a frame that was disposed to look for weakness in the juniors when compared to the majors. As such I incorrectly read my own chart and drew the opposite conclusion to what the actual ratio line indicates. I apologize for this as I should have caught it in the first place.

I should note here that even with this ratio doing what it is doing, many of the juniors are still seriously lagging the performance of the underlying metals. Some juniors and mid tiers have had a stellar performance but many of them are stuck apparently dead in the water. These are the issues that are being leaned on by the hedge funds and it is this which is the source of the constant selling interest that does not seem to let up. Keep in mind however that for every seller, there must be a buyer. Someone is on the other side of the short selling.

The original article now follows:

At the suggestion of my good friend Jim Sinclair, I have prepared a chart detailing the ratio of the price of GDX compared to the price of GDXJ.

The GDX does contain some smaller cap miners but it also mainly includes the large cap mining outfits.

The GDXJ on the other hand, is comprised entirely of medium cap and small cap miners.

Over 60% of the stocks that make up the GDXJ are Canadian firms. Nearly 14% are US headquartered with 13.31% being Australian. The remaining are from various countries around the globe.

While not a perfect representation, it is a useful tool for charting the underperformance ( in general) of the small and medium cap miners compared to the larger cap miners.

Note the steep decline in the line that began in the summer of last year which lasted throughout the remainder of 2010. Only towards the end of last year did the juniors recover a bit of ground but the best they could do was to retrace a small portion of their losses against the large cap miners by moving higher but since January they have gone nowhere against the large caps.

It seems to me that the hedge funds are selectively targeting some of the small and mid tier mining firms to go after with their short side of the spread trade that they have been employing. Perhaps they feel that due to their sheer size and financial firepower, they can overwhelm any buying coming into the smaller firms and thus create an effective put option against their long metals positions. I am not sure but either way, the chart reveals the reason for the frustration among many who own quality junior and mid cap mining firms whose share prices seem stuck in the mud even as the gold and silver markets continue soaring higher.

Let me take this opportunity to also clarify something in my earlier post about the HUI and XAU ratio charts. I did not mean to imply that the mining shares are trading at the same level as they were back in 2001 when silver was $4.00. That is of course preposterous as most have had strong gains over the last decade. The ratio charts' purpose is to show whether the shares are underperforming or outperforming physical gold and/or silver. What the charts do show however is that the mining shares in general have so seriously underperformed the gains in both gold and silver, that the ratio of the indices to the underlying metals is ridiculously skewed. In the case of silver, you have to go all the way back to 2001, a period in which very few people were calling for a major bull run in the metal. There was little if any excitement whatsoever in the mining sector back then.

In regards to silver in particular, the ratio of the HUI and the XAU to it may not be as good of a gauge of how the silver stocks in particular are performing when compared to the price of the bullion, mainly because both indices are dominated by gold producers, particularly the HUI, but both indices do hold silver miners in their basket as well as some gold miners who produce both gold and silver. Since silver has been outperforming gold on a percentage basis, and both of these indices favor a larger number of gold producers than silver, it is reasonable to assume that both of the indices would be lagging silver when a ratio is constructed, but not to this extent. To see these indices trading at such extremely low levels when a ratio is created is indicative of the kind of short selling pressure that is active in the mining sector in many instances.

It is just mindboggling to see how undervalued many of the shares are when compared to the metals. While many have moved strongly higher, a large number of them continue to lag and are not reflecting the kind of price movements that we would expect to normally see with the bullion making either all time highs in price or 30+ year highs.

If you want to get a "fair" or reasonable level at which the indices should be trading, run some statisticial analysis and see what the mean or average value should be then see what the standard deviation away from that mean is. I will leave that to my statistics friends but either way, the result is indicative of how cheap the stocks are compared to the metals in many cases.

Here are a few of the silver stocks comparing them to the price of silver and creating a ratio chart. A rising line indicates the stock price is outperforming the price of silver. A falling line indicates the stock is underperforming.

A pleasant exception: SLW


  1. Hi Dan
    I'm not sure the first para after the first chart is correct as the falling trend is juniors improving over large caps
    WK NZ

  2. If these companies decided to pay dividends in their own products, and let a company like Sprott's facilitate the distribution....how fast would these funds cover?

  3. Dan,

    "Walk" is right, GDXJ is outperforming GDX.

    Also on a positive note, AXR (Alexco) is outperforming SLW. I'm sure AXR is not the only small cap winner, but I have met these people on-site, and they are absolutely at the top of their game, operating in Yukon's historically rich Keno Hill district.

  4. SLW needs a different measure, as SLW is leveraged against the price of silver. SLW is NOT a miner. Suggest reducing SLW's ratio by at least half - and when you do, you'll notice that SLW's relative performance has been sub-par.
    Great analysis Dan

  5. Are any of the miners mentioned hedged to silver at a lower price point?

  6. I agree with walk and LH
    if the numerator of the ratio (top of the fraction) is GDX and the denominator (bottom of the fraction)is GDXJ, then a falling line indicates that the GDX is getting hammered more thsn the GDXJ. That is consistent with my limited observations - many large caps have gone nowhere for example Kinross and Agnico Eagle. But otherwise an excellent article, thanks

  7. SSRI and AUY stand out to us as the most blatant examples of this Dan. As always, excellent analysis!

  8. Dan, always appreciate your insights--on this topic in particular. How you do know its the hedgies playing ratio trades here... what tells you that as opposed to, say, the broader investment community continually seeing the rise in PM prices as an unsustainable spike? After all, if one maintains the assumption that gold is going to fall back to 900 and silver to 20 (which I do not), why bother with PM mining stocks? If this mindset is the case, we could be looking at a long slow grind as sentiment shifts, as opposed to a potential rapid unwind of ratio trades.

  9. Thanks for this. very very ugly. Why fight city hall.

    Personally I agree its ratio trades. There does not seem to be much that these thieves will not do.

    The regulators are bought, and not just the CFTC, I woulod not put it past them to drop the roof on those hecla miners.

    People, one mans opinion of course, you just begin to get the sense that silver is a very very dirty game.

    Even if its working.

    Question for the board.

    If, as appears indisputable, everything about this market is rigged, in a desperate effort to preserve faith in fiat currencies,what then would they not do.

    Would they confiscate? For many years I discounted such a course as preposterous.

    These are desperate men, they appear to be losing control of what they are doing. personally I think they are capable of anything.

    Where do silver and gold trade in a confiscation scenario.

    That presupposes a market, but just exactly whom is the other side of your sale? Or your purchase for that matter.

    The United States is sliding into anarchy. I would certainly get my metal the f out of the United States.

    And do just what mr. clever. Indeed. Foreign currencies, , I smell a gigantic sewer rat.

  10. Thank you Dan;I read your fine analysis always.Helps me make sense of why my calls are stinkin up my acct.HL, SVM seem to really have been my big losers so far, i know they should be much higher.Now I know why.JS Mineset, King World TF Metals Report, Harvey Organ,I read all of these and now your fine site, TOP NOTCH, many thanks.PS. i'm buying the stocks now because there so cheap they won't stay cheap foever.

  11. Mining stocks remind me of silver at $13. Suppresed and undervalued. Great time to stock up. I like SIL in addition to GDXJ & GDX.
    Thanks for another great post Dan.

  12. Vamoose: The more I study, the more I like "AN-ARCHY". An-archy does not mean a lack of laws, or "total chaos". It just means that WE are our own 'gods', not the government or any other oligarch. Freedom doesn't have to be scary or chaotic.

  13. You're totally off base, vamoose. The US is absolutely statist. We're heavily regulated, which is the opposite of anarchy. Also, worrying about confiscation of metals is silly. The total value of all the 401Ks and other paper assets is exponentially greater, and far easier for the State to appropriate. If the government wants to discourage us from owning metal, they'll tax it instead.

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  15. Great point SLW is 'not' a miner, it was down 9% this past week. Wonder if replacing the CEO was the only factor? Silver making new highs while SLW isn't? Silver poised to hit $50, with SLW revenue set to grow 80% by 2015...I cannot see this stock lagging much longer. Watch the 40 daily ema for near term support. While 120 ema longer term support. http://itzstockchartz.blogspot.com

  16. Dan,
    thanks for this post and the previous. What is not mentioned is the CATALYST that will reverse the underperformace.

    Would it be HUI breaking strongly to all-time highs?

    Or, given the free availability of leveraged exposure to PM price through ETFs, could the underperformance of the miners continue for years?

  17. Also agree with Walk and others.
    The chart you show is the GDX/GDXJ ratio.
    As the denominator (GDXJ) rises, then the ratio gets smaller.
    So, the juniors have been outperforming the majors lately.

  18. Dan has it right, but the chart is misleading.

    Create a snap chart using GDX:GDXJ and you'll see what I mean. I think Dan's chart is actually GDXJ - GDX, and the ratio chart is even more persuasive.



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