A sneaky thing happened over the last five trading days. The major gold mining companies leapt back into oversold territories (when measured against gold), the likes of which are only seen a few times a century. This summer as many mining analysts pointed out, miners hit their most oversold levels in the last 30 years, and only seen five times in the last 100. Following this extreme, the GDX rallied from $41 to $55 per share, a 34% move in two months, and the GDXJ made a 38% move in the same period.
Here is a chart of the GDX to GLD ratio. As you can see it has exploded upwards in the last few trading days.
When looking at this chart, the question must be asked – are we setting up for a sharp decline in the ratio, which would indicate another explosive rally in the miners?
There is never any certainty in the financial markets, but in recent conversations with friends of mine I’ve been saying the same thing over and over. When they ask me if now is a good time to buy mining shares I say:
“If you met a man who was 100 years old, and asked him if he’s ever seen the mining sector this cheap, he might do two of two things. He might first creak back in his wooden rocking chair (you not being sure if the creak is his back or the rocking chair itself), and second he might say, ‘Ahh yes. I’ve seen mining shares this sold off when compared to gold 5 times in my life. Once when I was 20, once when I was 40, once when I was 60, once when I was 80, and… now.’”
The risks are simply too great to buy retail investments during any of the other 95 years of this “old man’s” life. If you are not a mining executive, accredited investor, or resource developer, these are the only times in which your investment dollars can buy extreme leverage, and they must be looked upon as extreme and short-lived opportunities.
If you’ve ever used public transportation in a major city before, you know the train or bus conductor could care less whether or not you make it on before the doors close. The same could be said about the markets. They could really care less whether or not you get on at the right time. But heck…if a bus route only comes around once every 20-30 years… why not hop on and see where it takes you?
In more clear terms, I think this a good time to assemble a list of your favorite mining stocks, and see where they take you over the next 12-24 months.