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) and Market Vectors Gold Miners ETF (GDX) have outpaced the advance from SPDR Gold Trust ETF (GLD). 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, Van Eck, 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.