Huge Upside Potential In Gold Miners

Since this year’s bottom on May 28th, gold and silver miners are up approximately 20%, as measured by gold mining indexes like GDX and HUI. The GDX bottomed at 22.04 and closed today at 26.90, while the HUI bottomed at 203.50 and closed today’s trading session at 242.78.

But what is happening in the big picture? The following chart gives a very good understand of the larger trend in play. It shows the gold miners index (HUI) in red and the S&P500 in blue over the last ten years.

Since September 2012, both indexes decoupled from each other, although they had been positively correlated up until then. What’s more, since the fall of 2012, both indexes have gone in one direction. As a result, the disconnect between both is huge.

From a technical perspective, it appears that the gold miners are testing a resistance line which goes back spring 2013. The general rule is the older the resistance line (or chart formation), the stronger the positive trend change (either breakout or breakdown).

One should closely monitor the ongoing price action in the gold miners. If they would be able to break through the current price point (250 area), and stay above there for a while without breaking down, then the good days of gold and silver miners could be here. Inversely, if that price area would be too strong to break, a consolidation period or lower prices could be in the cards.

gold_miners_vs_S&P500_2005_July_2014

 

The significance of strength in the gold and silver mining industry should not be underestimated by precious metals owners. Miners usually (but not always) lead the metals higher. Similarly, stronger price action in silver than gold is another sign of internal strength in the precious metals complex.

 

Chart courtesy: ShortSideOfLong.

 

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