Over the past few months we’ve analyzed gold stocks from a historical perspective. We’ve compared this bull market to the past bull market as well as historical bull markets in equities. We’ve found that nothing is out of the ordinary. Gold stocks are not being manipulated. In fact, this bull market is actually ahead of the bull market in the 1960s and 1970s. They are following a typical bull market which evolves in three stages: the stealth phase, the wall of worry phase then the bubble or public phase. The wall of worry stage entails many twists and turns and marginal new highs along the way. Profits continue to rise but valuations drop as investors remember the first major correction of the bull market.
Gold Stocks have quietly rebuilt momentum. GDX reversed its breakdown in January and has steadily climbed back. One thing of note, the daily RSI has not pierced 70 since May 2010. Momentum has subdued for almost two years while the gold stocks have not had a rip roaring breakout to new highs since early 2006!
Though GDX is trading above its 2008 levels, it has never pulled away from or sustained a breakout through that level of 55. We are essentially looking at a multi-month consolidation but a potential breakout from a multi-year base. Should GDX rally back to 66 it would setup a potential cup and handle pattern which would project to 82. By the time the market breaks 66 it should have some serious momentum behind it and of the character that we haven’t seen since early 2006.
We believe there are a variety of driving forces (aside from the obvious) for a continued advance and break to new highs. First, the stock market is nearing long term resistance. It could fail at resistance coinciding with precious metals challenging new highs. Second, the combination of low valuations and a move in Gold to new highs would be very explosive. The market would realize that earnings are growing rapidly yet valuations are near a floor. Third, the large gold producers are increasing their dividends. According to Bloomberg:
Agnico and Kinross said Feb. 15 they will increase their payouts to investors. Barrick, Goldcorp and AngloGold have also announced dividend increases in the past year. Newmont Gold, the second-biggest gold miner by sales, said yesterday it’s more than doubling its quarterly dividend, 10 months after announcing it would link payments to the gold price.
Increased dividends will attract more mainstream investors who can achieve income, inflation protection and exposure to a bull market. However, the real gains will be in juniors who can grow their production or juniors which outline significant discoveries.