by James Brumley | August 14, 2014 10:08 am
For the first time since before gold peaked in September of 2011, gold mining stocks actually look like a better bet than the commodity itself.
More specifically, since all of these trading instruments hit a bottom last December, the Market Vectors Junior Gold Miners ETF (GDXJ[1]) and Market Vectors Gold Miners ETF (GDX[2]) have outpaced the advance from SPDR Gold Trust ETF (GLD[3]). Even more compelling is how, unlike GLD, GDXJ and GDX have managed to make higher highs in the meantime. It may be time to take — and trade — the hint.
The point has been made repeatedly since June: Gold mining stocks, and junior gold mining stocks in particular, have been leading the way. It’s not just a snap judgment call, either. After all of them hit long-term lows in late December, SPDR Gold Trust ETF has gained 8.6%, the Market Vectors Gold Miners ETF is up 33%, while the Market Vectors Junior Gold Miners ETF has advanced a stunning 45%.
It’s the first time in years that gold mining stocks have performed better than the commodity itself.
The leadership hasn’t gone unnoticed either. Oppenheimer[4], Van Eck[5], and a handful of other analytic names have suggested gold miners are a new buy thanks to recent breakouts. The technical breakouts are for real too … almost.
GDX, for instance, is only knocking on the door of a breakout. The line in the sand is right around $27.76, where the Market Vectors Gold Miners Fund peaked in March and hit a wall earlier in the week. Still, the fund has logged two higher lows since the late-2013 low, and there’s a cup-and-handle-ish feel to the shape of the chart since late last year.
Ditto for the Market Vectors Junior Gold Miners Fund, GDXJ, except its ceiling is at $45.84. Like GDX though, GDXJ has made two higher lows, and is poised to push off of its 50-day moving average line and punch through the resistance level.
While there’s still some work to be done, it’s an encouraging sign.
Of course, the question would-be investors must be asking themselves at this point is, are the underpinnings for a breakout from the gold mining stocks truly in place? And as a matter of fact, they are.
While it’s true that gold prices themselves have been stagnant (on a net basis) for the better part of a year, that’s not a bad thing given where the commodity’s price has slipped into a rut. See, while stagnant, it appears as if gold has gotten comfortable at a price that’s profitable for most gold miners to dig it up.
As the chart illustrates, for the better part of 2013 gold futures had been trapped in a relatively wide range between $1182 per ounce and $1434 per ounce. Since the beginning of 2014 though, the range has been narrowing, squeezing the price of gold to something closer to $1300 per ounce.
While it’s not a great price for gold, the chart says gold prices are going to stabilize around the $1300 area, slightly above the critical $1200 mark. The $1200 price is crucial, as that’s the average break-even point for gold miners. Some miners have to spend more to mine it, and some less. In the grand scheme of things, however, $1300 is a price at which well-run gold miners can turn a reliable profit.
Perhaps more important right now to the rally from gold mining stocks: This is the first time since early 2013 it hasn’t looked like gold was on the verge of falling off a cliff.
Bottom line? While the optimism in support of gold mining stocks or ETFs like GDX or GDXJ right now may be a little overbaked, it’s not off-base. Even if the commodity’s price doesn’t rise from here, the current price of gold is still fruitful for miners … and should be so for a while.
It’s the best news for gold mining stocks in a long while.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
Source URL: https://investorplace.com/2014/08/gold-mining-stocks-gdx-gdxj/
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