For the last few weeks I have been quietly amassing gold mining stocks. Looking at the weak fundamentals of all these companies and by listening to the negative opinions of the "experts" on CNBC and Bloomberg, I would have missed a great buying opportunity on this sector.
My approach is different from what most investors concentrate on. I look at pure price and volume action. In early December of last year, my daily computer scans started to detect price strength of gold mining stocks in relation to GLD, the gold ETF. Furthermore, GLD appeared at that time to be forming a double bottom at the 61.8% Fibonacci retracement level, from the 2008 bottom as seen in chart #1.
In chart #2, I am comparing GLD with SBGL, PPP, and TAHO, a handful of junior mining stocks. GLD bottomed in the summer of 2013 along with most mining stocks. In January of 2014, while GLD was testing the June 2013 low, some of the junior mining stocks were already showing strength by printing higher lows. These developments forced me to take a closer look at gold and the gold miners price action for the past 2.5 years.
When gold made a top in 2011, the junior gold mining stocks were already showing signs of weakness. By looking at chart #3, we can see that while GLD made a new high on September 2011, the GDXJ ETF that compiled the junior gold mining stocks made a lower high showing signs of weakness, and was leading the sector to the downside. Since its top on September of 2011, GLD has lost 38% of its value. To the same token, since GDXJ made its high on December of 2010, it has lost a staggering 83% of its value.
Since gold miners and especially the juniors took a complete beating during the last couple of years and taking into consideration the recent strength of some of the junior gold miners, we can give higher probabilities to the junior gold mining stocks to lead the rally in gold in the near future. Adding to that is also the possibility that the stock market is getting ready to have its largest correction since 2011. Then, we can assume that some of the money that is currently in overpriced stocks can move into a sector that is incredibly oversold at the moment, like gold miners.
Summary: By looking at the information that the market itself is providing through price and volume patterns, we can discover opportunities that are invisible to others. Fundamental analysis is a backward looking mechanism. By the time the fundamentals start to look attractive, the price appreciation has been already underway for some time and in some instances most of the easy money has already been made. At the moment, I believe we're still in the early innings of the gold mining rally.
I am currently long: BRD, PPP,TAHO,and AEM.