Closing the Gold Gap

After averaging a record $1,669 an ounce in 2012, Bloomberg notes that gold is off to its worst start since 1988.

But that’s nothing compared to what’s happened to gold miners…

Mining stocks are having a no-good, horrible year. Prices of gold miners have fallen further and faster than physical gold in 2013, widening a performance gap nearly two years in the making. The Market Vectors Gold Miners ETF (NYSE:GDX) has shed more than 30% since mid-September. Over the same timeframe, spot gold has only dropped about 11%.

But that could all be changing soon.

Gold mining stocks are once again beginning to show subtle signs of life. And while price hasn’t risen too dramatically, other clues suggest the painful slump could finally end.

Take a look at the sharp declines GDX posted in January and February. Both of these powerful downside moves were accompanied by big volume. Complete capitulation was on full display during the January breakdown below $45 and the February crack of $40. Sellers clearly wanted out at any price.

But just when everyone was ready to bury miners for good, signs of a potential bottom began to emerge. Last week, after holding about $36 for two straight days, GDX opened at its low–then surged higher. Strong volume rushed in, chasing the price back above $37. That’s the first time during this six month drop where strong volume has accompanied a move higher.

If you’re looking for long-term buying opportunities in mining stocks, watch for GDX to hold $37 as it consolidates last week’s move off its lows. Then, you’ll need price to confirm that a bottom is in place. Once GDX is back above $40, you’ll have a perfect low-risk entry point.

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning