A Potentially Historic Breakout in Gold Mining Stocks

In February, we wrote about the impending breakout in gold mining stocks and how it might compare to the history of breakouts in gold mining stocks. 

GDX closed last week at a fresh 7-year high and in both daily, and weekly terms closed +9% above the previous high. 

It now has a measured upside target of $50. 

While the breakout is significant for many reasons, we note that it is likely to hold because GDX also broke out relative to the S&P 500. Although precious metals bottomed in January 2016, they have not outperformed the stock market consistently until recently. 

The GDX to S&P 500 ratio broke out to a 3.5 year high. This signals that capital is now moving away from the stock market and into gold stocks.

GDX (top), GDX/S&P 500 (bottom)

Only time will reveal the significance of this breakout. But we have a few ideas.

First, we can take a look at the history of gold mining stock breakouts. 

Regardless of the historical index we use (Barron’s Gold Mining is below), each one generates the same conclusions. There is one massive and epic breakout (the early 1960s), one that had a chance but ultimately failed to duplicate that historic breakout due to post-crisis disinflation (2005) and several smaller breakouts that were followed by strong performance (1972, early 2000s). 

Barron’s Gold Mining Index

In February, I noted the 2005 breakout in the gold stocks (GDM, the GDX parent index) was most similar to the impending breakout in GDX. However, I neglected to mention that before that breakout, GDM had already gained 330%, and the HUI had already gained 600%! 

That breakout was past the midpoint of a move that began almost five years earlier. Yet, after the breakout, GDM and the HUI nearly doubled over the next two years, while GDXJ’s parent index gained another 150%.  

Furthermore, let’s not forget where we are now from a bird’s eye view. 

The gold stocks have just broken out relative to the stock market, but look at how cheap they are and how much further they could run in relative terms.

Gold Stocks vs. S&P 500

The history of breakouts in gold mining stocks argues that the current breakout should, at a minimum, lead to at least a few years of strong returns. Factor in the current fundamentals and historically low valuations, and there is potential for a repeat of the strong performance seen in the 1930s, 1960s, and 2000s.  

At present, GDX, which closed at $33.79, could snapback and quickly retest $30-$31. As of Monday, 93% of HUI and GDXJ stocks closed above their 20-day moving average, and 91% closed above their 50-day moving average. 

Overbought is good, but too overbought for too long can lead to a short-term pause or correction. It is also possible that GDX could reach the next resistance at $36-$37 before correcting down to $32 (as a retest). 

We continue to focus on identifying and accumulating the juniors (on weakness) with significant upside potential over the next 12 months. To learn the stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service.