Sunday , 9 December 2018

Gold Stocks At or Near Major Lows: Massive Upside Potential Exists

Gold and the miners have had a very disappointing year, but that shouldn’t cloud one’s vision. The bullish thesis either remains intact or it doesn’t. The math either works or it doesn’t…[and] the fundamentals remain exceptional…

This version of the original article, by SomaBull, has been edited* here by munKNEE.com for length (…) and clarity ([ ]) to provide a fast & easy read. Visit our Facebook page for all the latest – and best – financial articles!

…Below is a ~35 year chart of the XAU (a major gold stock index which is older than the HUI) that goes from 1983 to 2018, giving us quite a bit of data to go on.

If one lets emotions get the better of them, they might analyze this chart and see nothing but despair, especially over the last several years but I see this very differently.

  • I see a major gold stock index that is sitting near 35-year lows, one that over this entire period shown, has only been under the 60 level for about 10% of the time. The other 90% it has averaged well above 60. A mean reversion would result in this index at least doubling, which equates to about a 200-400% gain in many small and mid-cap gold stocks…
  • I see a major gold stock index that appears as if it’s at or near a major trough, not a peak. This 60 level has also proven to be some of the strongest support you will ever see for this index. That’s likely because you are so close to the zero line that it’s very difficult to push past it. It’s happened on a few occasions, so it’s certainly possible now, but it will just stretch the rubber band even more and the rebound will be equally as stunning as the decline.

I don’t see how anybody could look at the historical chart below and see gray skies.

The VanEck Vectors Junior Gold Miners ETF (GDXJ) is one way to play this reversion to the mean.

  • Even if GDXJ doubles from here, it will still be 60-65% below its 2011 peak. That just shows the potential upside from current levels. 
  • A well-picked basket of gold miners will generate much stronger returns than GDXJ in that scenario, as many will increase 3-5x on a 100% move in GDXJ. Imagine the returns in individual gold mining stocks if GDXJ heads back to 2011-2012 levels – which I believe it will at some point in the future.

(Source: StocksCharts.com)

This year hasn’t gone as expected for the sector as GLD and the mining stocks couldn’t breakout and then key technical levels failed. I believe this is just delaying the inevitable as the sector is about to embark on a massive multi-year run on the back of rising debt, out of control deficits, stunning surges in inflation and dwindling mine supply. It’s perfect environment for gold and the mining stocks.

Again, it’s unclear if a bottom has been reached, but if it hasn’t, then one has to ask how much downside is there really from current levels given the chart of the XAU shown above?…Anything can happen over the next few months…but if your investment horizon is longer than the time it takes for the leaves to change color and fall to the ground, then the returns generated from the miners over the years that follow will be something not seen in decades.

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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