Have Gold Mining Stocks Bottomed?
Over the next few years, you could make triple-digit gains in one of the most beaten-down sectors in the world: gold mining stocks.
It won’t happen overnight. But as I’ll show you today, a big bull market in gold mining is almost inevitable.
This sector will likely not stay as low as it is today. And before the run is over, we’ll see gold prices double—or more.
Let me explain…
Regular readers know “terrible-to-less-terrible” setups can be a source of huge profits. It’s a phrase we coined here at Profit Confidential to describe stocks that have been hit by bad news, digested most of the ugly headlines, and are now poised to run higher.
During the period, a stock won’t appear in a newspaper or magazine. Newsletter writers won’t touch it. Editors know even mentioning the stock or industry will turn off readers.
But in this “terrible” state, you can often scoop up stocks on the cheap. During these periods, you will see stocks trading at ridiculous valuations like half of their book value or five times their earnings. Investors can double or triple their money if any good news hits the wire.
Keep in mind that we’re not looking for perfection here. Any bit of good news can double the price of a cheap, hated asset. All you need is to go from “terrible-to-less-terrible.”
This is the type of situation in gold mining stocks. During the resource boom, investors fell in love with this industry. Because of the leverage inherent in the business, even a small uptick in gold prices could send mining shares soaring.
The formula worked so long as metal prices stayed high. But with the bust in precious metals, that leverage started to work in reverse. Mining companies like Goldcorp, Barrick, and Yamana, along with hundreds of others reported billions in losses.
Yet despite the ugly headlines, I’m actually starting to warm up to gold mining stocks. Most investors have given up on this industry entirely, leaving shares trading at cheap valuations not seen since the 1990s. Today, many stocks are going for pennies on the dollar from where they traded only a few years ago.
Granted, these miners aren’t profitable at current gold prices. But with so many short sellers betting against these companies, most of the bad news has likely already been priced in. Even a small rally in gold prices, I suspect, could send mining stocks soaring.
Of course, you don’t want to go catching falling knives. But there’s good reason to believe the entire sector has finally found a bottom Take a look at the chart below.
Chart courtesy of www.StockCharts.com
Market Vectors Gold Miners ETF (NYSEArca:GDX) is forming a classic double bottom pattern. As its name implies, the formation is made up of two consecutive troughs that are roughly equal, with a moderate peak between. This pattern typically occurs at the end of a long, drawn-out move.
Volume seems to be backing up the bullish argument, too. In February, shares exploded higher on heavy volume. Trading activity has also been light through sell-offs. This is a sure sign the firm is under accumulation by institutional investors.
How high could GDX soar? Today, mining stocks trade at a record discount to gold prices. Just for prices to return to their historical average, Market Vectors Gold Miners ETF would need to rise 156%.
The Bottom Line on Gold Mining Stocks
So, is it time to rush out and buy gold mining stocks? Not quite yet. After the recent run, GDX is likely to pull back to $17.00, where it met resistance earlier. A pullback to this level would provide an ideal entry point.
Regardless of the exact set-up, the big money is made from “ugly-to-less-ugly” situations. This is why now is precisely the time to look at gold mining stocks—when the idea makes most people sick to their stomachs.