Gold Miners: Long-Term Chart Continues To Improve

It’s been a frustrating couple of weeks for investors in the gold miners (GDX), with the index barely making any progress despite gold rocketing higher on Middle East tensions. While this significant underperformance to start 2020 has likely discouraged investors, the key is that investors don’t miss the forest for the trees. The Gold Miners Index’s long-term chart continues to strengthen despite this decline, with many of the companies heading into what will be their strongest year of earnings growth in over a decade. Based on this, I would view any further weakness below the $26.50 level as a buying opportunity.

(Source: TC2000.com)

The Gold Miners Index had an exceptional finish to 2019, and finished the year up just under 40%, beating out the returns of both the S&P-500 (SPY) and Nasdaq-100 (QQQ). This has set the index up on the right foot for a healthy 2020, given that it’s heading into the year on the back of a multi-year base breakout, a multi-year base breakout in its respective commodity, and relatively subdued sentiment given the strong performance. It would not be surprising in the slightest if the index gave up some ground to start the year as the index generally sees a 15% or more substantial draw-down in every calendar year, and the key is that this weakness is likely going to provide a buying opportunity. This was the case during 2009 when the index finished the year with a similar 37% return and started 2010 off weak to get its draw-down out of the way early. If history repeats itself and we do see a similar draw-down, investors should be ready to start accumulating at the $26.50 level or lower.

(Source: TC2000.com)

As we can see in the above chart, the Gold Miners Index put up a similar return in 2009 of between 35-40% and added significantly to its gains with a 33% return in 2010. However, for those that were interested in momentum without any attention paid to risk, Q1 was not a fun quarter to be overweight the gold miners. Instead, the index corrected more than 20% to begin the year, but this ended up being the best buying opportunity of 2010. Therefore, the best move heading into 2010 was to be underweight miners and take advantage of weakness, rather than loading up and hoping to see a similar performance as the prior year. While those investors that did buy at the end of 2009 returned 33% in 2010, they had a poor risk-adjusted return with a draw-down of 22% they had to sit through. The best trade was buying into the Q1 weakness, which allowed for a 45% plus return with minimal draw-down.

There is absolutely no reason that we should expect history to repeat itself perfectly, but history does often rhyme, and a similar setup would not be surprising. As we begin 2020, it looks like this may be the case, with the index unable to break to new highs despite the Middle East tensions, and many of the miners selling off ahead of their Q4 earnings reports. While I would be surprised to see a similar 20% draw-down from the highs, which would imply a drop to $23.90 on the Gold Miners Index, a 10-15% draw-down, which lands in the $25.50 – $26.90 range would not be surprising. A move of this magnitude would shake any weak hands out of the trade and put a massive tailwind under the miners heading into the remainder of 2020, given that they would be trading at incredible valuations. This is especially true given that the miners are set to report their best year of earnings growth in over a decade thanks to the gold breakout last year.

(Source: TC2000.com)

If we take a look at the monthly chart of the Gold Miners Index above, we can see that the index is trying to build a large cup and handle, with the handle in the form of a new base. The range for this handle seems to be $26.00 to $30.00, and therefore, dips to the $26.00 level are going to be excellent buying opportunities. The fact that the 20-month moving average (teal line) is finally trending higher after three years of being flat is a positive sign, as it suggests a new uptrend is on the horizon.

(Source: TC2000.com)

On the daily chart, the index has strong resistance at $31.05, and the first strong support level at $26.00. I believe that any pullbacks towards this $26.00 level will be opportunities to add to positions in miners, especially given that everyone seems enamored with the major averages, and is paying little attention to commodity stocks. This is excellent news as it makes commodities a less popular trade, especially given the fact that the sector is set up for the strongest earnings growth of any industry in 2020.

To summarize, I would urge investors not to let early weakness to start the new year discourage them. The gold miners are at extremely attractive valuations relative to their past bull market, and earnings growth is set to increase between 30% – 50% for many of the larger gold producers in 2020. Therefore, investors should treat weakness below the $26.50 level as a chance to start accumulating positions and should focus on the most attractive takeover targets in the sector, as I expect M&A activity to run rampant with metals pricing finally solidify yearly breakouts to finish 2019. The most attractive takeover target in the Gold Miners Index currently is Silvercrest Metals (SILV), a silver producer in Mexico with a new discovery at their 118 Zone, and I have started a new position in the stock recently. If we could see further weakness in metals heading into the back half of the month, I would consider adding to my positions.

The VanEck Vectors Gold Miners ETF (GDX) rose $0.01 (+0.04%) in after-hours trading Tuesday. Year-to-date, GDX has gained 21.60%, versus a 23.20% rise in the benchmark S&P 500 index during the same period.

GDX currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #8 of 33 ETFs in the Precious Metals ETFs category.

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