That being said, let's step back and take a long-term look at the miners. Where have we been? Where are we going?
After peaking in early 2008 at $55.10, the GDX sold off hard for the next 9 months ultimately bottoming at $15.34. This marked a peak-to-trough decline of 72%. I've marked that bottom with a solid green line for reference. The price of gold during this time was about $750/oz. The GDX didn't hang around those levels for long, however, as just a couple months later it had more than doubled, far outpacing the gains in gold. Unknown at the time, the precious metals were about to stage an epic run taking gold to new all-time highs.
A couple years later, GDX peaked a shade above $65 - a three year trough-to-peak move of 333%. Notice how over 100% of the 333% move came in the first 2 months of the rally. At that time, value investors who set emotion aside and bought below $20/share were handsomely rewarded.
Let's compare that experience to what we're seeing today. GDX peaked at $65.49 in September 2011, shortly after gold had tagged its ultimate high. For the last 3 years, gold has been sold relentlessly, closing at $1173/oz this past Friday, a new multi-year low and 39% below its peak. The GDX, however, has one-upped the shiny metal over the same time frame, falling 74%. Now refer back to the peak-to-trough decline of 72% in 2008 - look familiar?
What's particularly interesting about the current environment is that while the GDX is within spitting distance of its all-time lows, the price of gold is basing at a much higher level. In 2008, gold was trading at $750/ oz while today it's at $1173/oz, or more than 50% higher. In other words, the GDX is FAR more undervalued today relative to gold than it was in 2008.
Speaking of undervalued, I want to share a graphic from the Central Fund of Canada (Ticker: CEF). If you're not familiar, its "investment policy, set by the Board of Directors, requires Central Fund to maintain a minimum of 90% of its net assets in gold and silver bullion of which at least 85% must be in physical form." What makes the CEF so attractive, in my opinion, is that its gold and silver Bullion is "stored in the highest security rated treasury vaults at a Canadian chartered bank on an unencumbered, allocated and segregated basis." In other words, the fund holds "auditable," physical gold - not paper promises.
How long can the market remain this disconnected from reality?