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Before delving into reasons that are supportive of expectations of a sustained rally in the miners space, I want to note that there is no question that going long the miners is a counter-trend trade.

Counter-trend trades are difficult, unless one is able to buy close to the trend reversal point. So, it's imperative to use tight stop losses. On the other hand, when trading with the trend, if you hold long enough, the trend will bail you out so stops can be looser.

In a previous article, I detailed some signs of liquidity manifesting in the precious metals space. In this article, I will be focusing in on the gold miners to gold ratio. I will be using the Gold Bugs Index, the HUI and spot price of gold (NYSEARCA:GLD). The best ETFs to track these are the Market Vectors ETF Trust (NYSEARCA:GDX) and the SPDR Gold Trust (GLD).

The gold miners as a whole are up approximately 1070% from the beginning of the secular gold market in bull, while in comparison gold is up about 510%. During this time, there have been times where the miners had significant sell offs from 20%-65%, many proclaimed the top was in for precious markets, coinciding with abysmal sentiment. I believe we are approaching such an opportunity.

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This is the ratio over the entirety of the secular bull market with the gold miners index on top.

I'm going to be looking at previous instances of buying opportunities in the gold miners within this secular bull market, what the miners to gold ratio was saying at that time, and the deviation of the miners to gold ratio to its 200 day MA, to get a sense of the "snap back" potential.

November 2000

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This was the first leg of the secular bull market. The ratio low which indicated a complete lack of interest in the sector was 0.135 and it was 46% lower than the 200DMA.

May 2005

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The ratio low was 0.3970 and 23% below its 200DMA.

October 2008

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Like most sectors in 2008, the miners were hit hard, especially relative to gold and the ratio fell to 0.204 and it was more than 50% below its 200DMA.

Today

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The ratio currently sits at levels that were only lower prior to the birth of the secular bull market and the liquidity panic in 2008. The ratio is currently 21% below its 200 day MA.

Conclusion

Writing this article actually made me realize that while the gold and silver miners (NYSEARCA:SIL) are currently oversold, they could get even more oversold. They are not near levels as reached in 2000 and 2008.

Despite this reason for caution, I think the miners are reaching attractive valuations amidst the pessimism among investors in the sector despite the improving fundamentals for gold and silver (NYSEARCA:SLV). In my earlier article, I listed reasons for optimism, despite the disturbing trend, detailing signs of increased liquidity within the sector.

Right now, no momentum based investor is even looking at the precious metals sector, however the miners to gold ratio is indicating that we are approaching valuation levels that will begin to attract value investors.

Once again, this is certainly a counter-trend trade, so tight stop losses are a necessity. I will be using a close below today's low of 40.99 on GDX as a sign that despite the attractive valuation, improving liquidity, and possible selling exhaustion, that the trend is not ready to change.

Disclosure: I am long NUGT.

Source: Important Ratio Pointing To Attractive Valuation For Gold And Silver Miners