Junior Miners versus Miners

Earlier this week, Chris Kimble of Kimble Charting shared his thoughts on the relationships between GDXJ (Junior Gold Miners) and GDX (Gold Miners). As he points out, the ratio between these two is an important one to monitor in regards to the overall Mining and Precious Metals sectors.

But why exactly is it important? In the same way that we like to see Small Caps (i.e. the Russell 2000) outperform the broad market, we want to see Miners with smaller market caps outperform their large-cap peers. When this happens, it’s typically a sign of a “risk on” environment, because investors and traders are becoming more confident in the space, allowing them to take more risk via smaller companies. However, while this relationship has made a significant move upwards in recent weeks, it is still in the same consolidation/triangle we have seen since 2016. Until we move higher (ideally, somewhere in the green circle noted below), there is no confirmation of a move higher.

Further, Precious metals as a whole could be bottoming against equities as well. Here is a chart from J.C. Parets on the relationship between GLD (Gold) and SPY (S&P 500):

Again, there is no confirmation yet, as we are still in the same channel we have been in since 2016, similar to the ratio above between GDXJ and GDX. One positive sign is that momentum, measured by RSI, recently hit its highest level since “peak Gold” in 2011.

A third relationship I think traders and investors need to be monitoring is the relationship between Silver and Gold. Similar to GDXJ/GDX, in that we want to see Junior Miners outperforming Miners, we want to see Silver outperforming Gold. Silver is generally believed to be a “riskier” position than Gold. Thus, if Silver can begin to consistently show larger returns than Gold, it’s a signal that capital allocators are seeing more long-term strength in Precious Metals and are willing to take more risk for higher gains. Unfortunately, until we can see a sustainable turnaround in this ratio, there is no confirmation that we on the verge of a bull market in Precious Metals.

Zooming in on the relationship (between Silver and Gold) to see where we currently stand, as you can see, the ratio is still sitting below a large area of resistance. Until we can get back above this zone (preferably into the green circle), there is no sign of a longer-term trend. Although, the positive divergence on RSI does add an element of bullishness.

Given everything we have discussed here, including Chris Kimble’s notes on the GDXJ/GDX relationship, I think there are some very encouraging developments in the Precious Metals space. Sometimes, these bottoming processes can take much longer than expected. And as a fan of “confirmation”, I think we still need to see all three relationships move into decidedly positive territory. That has not come to fruition yet, but the importance of monitoring them is becoming clearer. To read more from The Chart Report on Chris Kimble on Precious Metals click here.