A Potentially Historic Breakout In Gold Mining Stocks

In February, we wrote about the impending breakout in gold mining stocks and how it might compare to the history of breakouts in gold mining stocks. 

GDX closed last week at a fresh 7-year high and in both daily, and weekly terms closed +9% above the previous high. 

It now has a measured upside target of $50. 

While the breakout is significant for many reasons, we note that it is likely to hold because GDX also broke out relative to the S&P 500. Although precious metals bottomed in January 2016, they have not outperformed the stock market consistently until recently. 

The GDX to S&P 500 ratio broke out to a 3.5 year high. This signals that capital is now moving away from the stock market and into gold stocks.

GDX (top), GDX/S&P 500 (bottom)

Only time will reveal the significance of this breakout. But we have a few ideas.

First, we can take a look at the history of gold mining stock breakouts. 

Regardless of the historical index we use (Barron’s Gold Mining is below), each one generates the same conclusions. There is one massive and epic breakout (the early 1960s), one that had a chance but ultimately failed to duplicate that historic breakout due to post-crisis disinflation (2005) and several smaller breakouts that were followed by strong performance (1972, early 2000s). 

Barron’s Gold Mining Index

In February, I noted the 2005 breakout in the gold stocks (GDM, the GDX parent index) was most similar to the impending breakout in GDX. However, I neglected to mention that before that breakout, GDM had already gained 330%, and the HUI had already gained 600%! 

That breakout was past the midpoint of a move that began almost five years earlier. Yet, after the breakout, GDM and the HUI nearly doubled over the next two years, while GDXJ’s parent index gained another 150%.  

Furthermore, let’s not forget where we are now from a bird’s eye view. 

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