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January 12, 2012

Gold Mining Shares Set to Soar

After tumbling, in a very volatile fashion, roughly 25% from a September peak into a December low, gold mining shares have bounced back strongly into the new year with a 10% surge in only two weeks. By several measures, these shares remain extremely undervalued and could be set for explosive gains in coming months. Beginning with a longer-term view, note that miners have spent the last year unfolding a massive consolidation pattern:

gold mining shares consolidation pattern

Massive consolidations tend to lead to massive extensions. Once this pattern breaks higher, gold miners could very well be on the path to another 2-300% run over an 18 to 24-month period.

On a shorter timeframe, mining shares remain severely oversold.

gold mining shares bullish percent

Despite a 10% run off the December low, bullish percent has barely budged and remains in extreme territory. A much larger move will be required before mining shares tag an overbought reading. GDX may therefore be primed to test the upper bound of its consolidation range in coming weeks in preparation for a subsequent breakout.

Gold miners also remain undervalued relative to the price of gold itself. For the first 8 years of the gold bull, a price of 0.19 oz of gold for the XAU was a screaming buy signal for the shares.

XAU to gold ratio

As mining shares consolidated over the past year, gold soared, and the shares lost about a quarter of their value relative to the metal. Once these shares are ready to extend beyond their consolidation zone, they should quickly revalue in terms of their gold price. According to the cycle studies detailed in the Member Letter, precious metals should extend their bull market gains over the next two years. Mining shares must therefore generate enormous gains simply to regain the low end of their historical range versus gold.

The ride will certainly not be smooth, as gold mining shares tend to sport high volatility and the industry is fraught with pitfalls. However, the end result should be very rewarding for those able to weather the ride.

 

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