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This is something quick I’m whipping up to get the Excel and idea to paper. I had a background in quality control in IT services, and I had remembered statistical process control I had used for a bit 20 years ago when looking at price charts. This is what SPC looks like…

This is different from a price chart in a lot of ways – as price can run with momentum. It also tends to vacillate in ranges. In the chart above, this is meant to detect issues with a process. Each point might be a months’ average of widget length from mean. You are allowed a tolerance from mean, but when it hits the outskirts of the process, you know something is broken. You can also see a bunch of different rules which tell you something is wrong.

Here’s another chart…

You can see an “upper control limit” and “lower control limit”. What I had observed in a lot of gold miner charts compared to gold is that there are times when these seems to gravitate towards being overvalued or undervalued – and I equivocated them to an Upper Control Limit and Lower Control Limit.

I included Don Durrett in my post because the dude is a savant with miners on details, as he literally has a database of 900 of these he must update all the time. I just did some of my stuff in access to marry a gold price list to a FSM price list as it seemed there were days gold traded and FSM did not. You then pipe that out to Excel and have at it.

What I want to look for are times when things are undervalued to buy, and overvalued to sell. Now, it’s not a matter of all in buying or all in selling. In those cases, you may want to buy tranches in, and sell tranches out. Why? No one can time a perfect top or bottom. However, if you are buying above the 75th percentile and selling below the 25th percentile, you may do ok. The caveat to that is that at some point gold may go down faster than your miners, so just because the ratio is low, doesn’t mean you sell. You would have to have a context for the markets to buy or sell, this would just tell you that your hunch was right.

I also subscribe to Dave Kranzler’s Mining Stock Journal – he pounds the table on USAU. There were times a few years back when gold was around these areas and he was trimming his position at $16 and re-buying at $9. We have been in the $4 and $5 handle for some time, with a recent spike to $7. A caveat here with junior miners is they also tend to dilute the shit out of their stock, but it’s not the case with USAU. Very tight share structure. Even if it wasn’t, you would expect that a good miner would be diluting but then adding lots of value back. A high ratio here on a GREAT junior miner then tells you that the juniors haven’t gotten the love yet. If you feel some juniors had moved, using ratios is also a good way to find which ones are still stupid under valued.

I drew arbitrary lines there. The UCL and LCL are meant to capture the “normal” trading range for the stock. However, these lines are….arbitrary.

I then used MATH to draw better lines.

Those lines come from finding the quartiles using Excel. You could probably do the same with standard deviations, which might give you higher confidence, but the idea here was just trying to find normal trading ranges, then when items were stupid cheap or stupid expensive against gold.

As the saying goes – gold may move first, then the majors, then the mid tiers, then the juniors. FSM is a tweener of junior to mid gold and a tweener with junior to mid silver.

If we look at GDX as a proxy for majors, we can see…

I looked at a normal trading range, and could find some points to draw lines to. You can see that in the green, it’s near a mid point. Not really undervalued or overvalued. To me, the majors made a move and will continue to outperform gold as long as we are seeing prices above $1900. I’ve seen a lot in the ST moves, miners tend to lead first down, but it’s also possible here that you see “strength” from the miners as perhaps gold retreats to $1900. Why? Because they make a ton of money over $1900. This is where you could see the ratio dump lower. Gold could go down, but GDX holds steady. Maybe it touches 42 on here. And gold seems to be in a downtrend. That’s when I’m selling for a trade.

But I also use GDX to then compare to FSM and others to see if it’s still undervalued to the majors.

This is the time then that people may look at it undervalued to the majors and get their positions. But I also like to look at it against the GDXJ

You can see it’s still undervalued to GDXJ as well, so it is underperforming their peers.

It all started with an Excel sheet here. Take a look around line 2522 for some of the calcs. The idea then was that a database could provide you, statistically, who your top undervalued or overvalued are compared to gold, majors, or mid tiers (GDXJ). In all cases, you can see, visually, FSM is undervalued to all three. The math here shows you how you could show people how in stats. Some can use PE ratio, others do valuations – there’s a lot of ways to do this, but simply comparing price against relative peers can give you a better sense of relative value.