Markets Tight-Ranged Except for Silver and Gold

Stocks, bonds, currencies, and commodity markets traded nearly unchanged during the hours of yesterday’s abbreviated session at the New York Stock Exchange. The price of silver and gold were notable exceptions, however, as these markets broke significantly higher. The price of silver rose nearly 2%, while gold increased by 1%. 

This small price spike in precious metals may be a reflection of some investors looking to hedge risks as the year comes to a close. Option sellers have held on to a subtle risk premium over the past few days, implying that they too see slightly elevated risks after the holiday stretch has past.

By contrast, retail traders and investors have largely embraced risk as evidenced by the fact that the micro-cap index (RUMIC) continues to outpace the broad market indexes. The chart below compares the surge in the price of iShares’ Russell Microcap index-tracking ETF (IWC) with the S&P 500 (SPX) to demonstrate that growing appetite for risk. 

During a holiday market session with typically lower volumes in trading, the only traders and investors present in the market are those that are paid to be there, such as clerks and market makers, and those traders or investors who really want to be there. It is useful to pay attention to what happens on these days because the movement in prices created by these individuals may reflect larger or developing undercurrents in the market overall.

For example, the chart below compares IWC with three precious metals ETFs: State Street’s gold tracking ETF (GLD), iShares silver tracking ETF (SLV), and Van Eck’s Junior Gold Miners fund (GDXJ). All four of these funds show a recent uptick in price action, confirming that the increased appetite for risk and opportunity among investors is finding its way into the precious metals sector. 

Among small-cap gold and silver mining companies, three in particular that mine both metals have shown unusual relative strength. Hecla Mining Company (HL), Coeur Mining, Inc. (CDE), and Gold Resource Corporation (GORO) all have in common both gold and silver mining operations. The chart below compares the performance of an equal-weighted portfolio of these three stocks to GDXJ shares.

The comparison shows a surprising surge over the past three months, with these stocks nearly doubling in price, on average, over the past six months. That small-cap mining companies have increased in price on a day when the price of gold and silver have increased is not surprising. But the fact that these stocks have jumped so strongly during a period of time when the price of gold and silver has been drifting slightly lower may be an indication that well-informed investors sense a coming increase in demand for the metals. Experienced chart watchers recognize that signals like this usually imply continued moves to come.

Stocks and other assets traded nearly unchanged in a shortened, low-volume Christmas Eve trading session. However, market participants show both an appetite for risk among buyers and a hedge against risk among sellers, suggesting that larger moves may come shortly after the new year. Both micro-cap stocks and gold mining companies were on the rise in yesterday’s trading.

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