How High Will Gold Stocks Fly?

How High Will Gold Stocks Fly?

The evidence supports what we have been saying for weeks: when gold leaves the station, the train cannot be stopped!

Meanwhile, the chart reflects a YTD return of almost 10 percent for the precious metal. This happened in less than two months, while gold spent almost a year to drop back by 30% in 2013.

Gold 200MA 2014

With this, the double bottom (June & December 2013) has been confirmed. Naturally, for regular Sprout Money readers, this is all old news as we have been advising to take advantage of weakness in the gold market for months. Especially those investors who have listened well and took some decent positions in the best gold mining stocks. Those were the real bargains in our opinion.

Investors with nerves of steel and excellent patience are being rewarded like kings today. The HUI-index, the reference for gold mining stocks, broke through the 200-day average with plenty of conviction to end the week north of 240 points!

Mind you, the HUI was still listed below 200 points at the start of 2014. A rally of 22% in a month’s time… that is the kind of fireworks you can expect with gold mining stocks. But that is all behind us now. We would rather look forward at what the future possibly holds. The first question that pops up in our heads is: how real is this rally?

Not only did the HUI crush its 200-day average in dollar terms, the index also powered through the long term average in terms of gold

And this from the lowest level since 2001!

HUI in gold from 1995

In other words, gold mining stocks have never been this cheap!

The odds that we just experienced an historic bottom in the gold mining sector are huge. So today we are looking up again: to what levels might gold mining stocks rise?

Let us see what the market tells us with regards to technical analysis. In order to do this, we will take a closer look at the bigger picture, the monthly chart of the HUI-index.

What are we looking for on that monthly chart? We want to see whether a long-term bottom has formed or not.

HUI monthly chart TA

As you can see on the chart, the 200 points level has been tested with success over multiple years (the green circles). The current rally is moreover marked by a distinct white candle, also visible on the chart for 2005 and 2008, right before an impressive rally. Furthermore, certain indicators of momentum (RSI, MACD) are at historically low levels (the blue circles), which means that on a technical basis, gold mining stocks are in ‘pole position’ once again!

When the race for the gold mining sector starts, things might move really fast. If we look to the sky, there is not much stopping the upcoming fireworks for the gold mining sector as well.

The first hurdle can be found at 350 points for the HUI, but considering this perfect set-up we expect this rally to follow through to 500 points without stopping. As you can see on the chart above, that is also where the rallies stranded in 2008 and 2010 (the red circles).

500 will be our first Target Price for the HUI index!

If you take a closer look at those previous rallies, our target might even be achieved in the next 12 months! No, that is not a typo. More than 100% return from the current level for an index.

But investors that pick up the best gold mining stocks are potentially looking at a multiple of that. In the Gold & Silver Report we already have some tickers that have doubled in price for 2014, and we are just getting started. For a word of caution, understand that gold mining stocks are the most volatile equities around. Expect big upswings followed by hugh downdrafts! But he who stands this kind of heat, has the outlook for exceptional returns. Hold on tight!

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Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

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