Conflicting Signals for Mining Stocks from Two Important Indicators

December 6, 2009 – I have not commented on the stocks of gold and silver mining companies since August 22nd because there hasn’t been much to say, but that has changed.

As expected, the XAU Index of mining stocks eventually broke through “resistance around the 152-154 area” and kept climbing. However, I am now getting conflicting signals from two important indicators.

The following chart shows that the appreciation of the XAU Index over the past year has been exceptional.

It is clear from the above chart that based on historical experience, now is the time to be taking profits in the mining stocks. However, this conclusion is at odds with the following chart.

By looking at the price of the XAU Index in terms of gold, the areas to be buying or selling the mining stocks are clear. And right now, by this measure the XAU Index – and therefore mining stocks in general – are still relatively undervalued. Consequently, they should continue to be accumulated, not sold as the first chart indicates. So which chart is correct?

It is a difficult decision, but I think the second chart is more important. It addresses relative valuation, which is the more important factor in the decision to buy mining stocks. Also, the appreciation in the mining stocks over the past year has been distorted by the relatively low valuation placed on them as their prices crashed in the de-leveraging frenzy after the Lehman Brothers collapse.

So for now, I continue to believe it makes sense to accumulate mining stocks. For my specific trading recommendations, see Trading.