Since last summer, investing in the mining sector has been akin to riding
a mini roller coaster. There have been two huge rallies, two sudden and sharp
declines while more than a handful of individual stocks have rebounded over
200% from their lows. Nevertheless, as we noted a few weeks ago the weakness
of the metals won out and are dictating the terms. Since we covered the metals
in our last
missive we wanted to focus soley on the miners. A look at the bear market
analog chart as well as a very long-term chart of GDM illustrates the coming
risks and opportunities.
Here is the updated bear analog chart for the gold stocks. The XAU is used
for the current bear market. This chart helped identify the opportunity at
the June 2013 and December 2013 lows. There has been only one bear market worse
than 70%. If you believe the gold stocks have not bottomed then this is the
second worst bear in terms of time. The chart argues that if the December low
is taken out, it would be so only marginally. A 65% loss at the December 2013
low could become 67% or 68% but probably not anything worse.
Below is a weekly line chart of GDM, the NYSE Gold Miners index and the basis
for GDX. This is one of the broadest indices for miners. GDM has two levels
of strong support which date back 20 years. GDM would have to decline 13% and
17% to test those supports. At the top, we plot the assets in the Rydex Precious
Metals Fund which have dwindled 86%. We plot in blue a rough projection only
for consideration purposes.
In looking at long-term charts of miners, I find that a double bottom (seen
above) is definitely possible. In the chart below we plot GLDX, GDXJ, SIL and
SILJ. Considering a 3% margin of error, three of the four ETFs would have to
decline more than 25% to rule out a long-term double bottom.
The risk is quite clear. Failed moves produce fast moves. The miners failed
to breakout and have tumbled. The late May lows mark the next support but these
points do not amount to much beyond the daily charts. Furthermore, after $1200
Gold's next strong support isn't until $1080, the 50% retracement of the entire
bull market. Hence, there is a growing risk of the miners falling to their
December lows. Therein lies the opportunity. Only time will tell but that point
could immediately mark a shift from risk to amazing opportunity.
Good Luck!
We invite you to learn
more about our premium service in which we will soon publish a report
on our top 5 buys at the bear market bottom.
