Fool's Gold Report: Miners Plunge, but Bullion Holds Gains

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Ordinarily, you can expect the price of bullion to move in the same direction as the miners of that bullion, albeit not necessarily by the same amounts. Yet today, mining stocks and metals prices moved in opposite directions, with April gold futures rising more than $4 per ounce to $1,294 and March silver gaining almost $0.17 per ounce to $20.32. That was also enough to send SPDR Gold Shares (GLD 0.60%) up 0.1%, even though the iShares Silver Trust (SLV 0.64%) fell by the same margin. But the big move of the day was in the MarketVectors Gold Miners ETF (GDX 3.65%), whose shares gave back almost 3.5% today.

Source: Kitco. As of 5:30 p.m. EST.

What's up with gold and down with miners?
For bullion, many investors pointed to positive news from China that suggested that economic activity was on the upswing. A more than 10% jump in export activity in January from the previous year's levels suggested a stronger economy than many thought, and with gold's big plunge in 2013 coinciding with concerned about signs of sluggishness in China's economy, today's news was welcome. Indeed, the fact that platinum and palladium outperformed gold and silver points to the industrial-focused nature of the positive sentiment today.

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

Yet rather than contradicting that thesis, the drop in miners today just represents a check on what has been an extremely strong rally for hard-hit gold mining companies during 2014. To put the loss in perspective, the Market Vectors ETF entered the day up 21% on the year, even though bullion prices had risen only about 8%. Some degree of leverage is appropriate given the economics of gold mining, but unsustainable gains tend to reverse themselves after a while.

Moreover, some astute traders might be hoping to rebuy shares of gold miners at lower prices following earnings announcements in the coming days and weeks. For many miners, results will look particularly ugly, as they won't reflect the 2014 rebound in bullion prices. With many companies having taken steps to shore up their balance sheets and reduce costs, any improvement in the metals themselves could produce real gains.

Investors must prepare themselves for big adjustments downward in reserves, given the drop in bullion prices in 2013. If gold prices recover, though, those reserves will come back and add to profits later. That could help set the stage for an even larger recovery down the road.