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For Some GDX Perspective, Look How Undervalued Gold Stocks Are Right Now!

|Includes: DUST, VanEck Vectors Gold Miners ETF (GDX), GLD, NUGT


The above chart came from an article by Jeff Clark, that was posted on the internet July 7, 2013, and you can read it here. The chart shows that gold stocks are cheaper now than at any time in the past, including the selloff in 2008 during the financial crisis. Even in the 1990s, when gold was trading less than $300 per ounce, at no time did gold miners trade below their book value. If gold stocks are trading below book value now, to return to the $16 price GDX hit in 2008, would require trading at about 60% of book, something that is beyond my ability to fathom. To see exactly how bad it was in 2008, look at the following chart of GDX.

If you look at the above daily chart of the gold miner ETF (NYSEARCA:GDX) you will notice that we fell in 2008 about 8 weeks, from 50 down to 27, then rallied a couple weeks to just under 38. Then in another 5 weeks, the GDX fell to a low of 16. The entire move from 50 down to 16 only took 15 weeks. From the low, in less than two weeks, we came back to 24 and eventually worked up to 33. If you bought GDX in 2008 at 24, you had less than 4 weeks to get your money back, another dip and back above 24 in less than 3 weeks. Unlike the current manmade self-inflicted crisis we are going through now in Washington, 2008 was a real crisis where survival of the entire financial system was in doubt. But even in the real crisis, they could not keep GDX under 24 for long. Top to bottom, the GDX dip in 2008 lasted 15 weeks (3 1/2 months). The current downtrend in GDX started from a top in September 2012 and took 9 months to hit the July low, and has gone sideways 4 more months to today (13 months total), as we retest the bottom.

I don't know where the current bottom is exactly, but I do know that if I am long GDX in the 24 area, and it sells off, I should not have even 30 days to wait before I am again making money on the trade. GDX has fallen to $23.13 this week, $5.51 down from the recent high. It could hit 22.14 to match the $6.50 from the previous selloff which would be 7 cents below the July low. Or, it would stop to 21.50 so that NUGT hits 30. In my past articles I have mentioned that if the ultimate low in NUGT is 30, it should more than double to 61 on the kickback rally.

This could be a generational buying opportunity in the gold miners. To reach the same high that gold hit in 1980, when compensating for inflation, gold would have to trade at a price over $9,000. At over $9.000 in gold, where do you think the miners would be trading? I don't know what the all-time high of gold will be in my lifetime, but I am pretty sure that I have not seen it, as the 2011 high under $2,000 should inevitably be taken out on the upside to $2,500 or $3,000 at least.

Surviving The Bottom

But right now, the problem is that GDX keeps falling and it is hard to hold a leveraged ETF like NUGT during the hard move down. If I am totally wrong and GDX matches the 2008 of 16, the entire investment one has in NUGT will be lost as a 33% drop from here in GDX, means a 99% loss in NUGT that cannot be made back up on any rally. That is why one needs to read my article here, that explains how one has to have two traunches of cash and only start on the second traunch when the first traunch is gone.

Another thing one can do is sell out half one's position on any rally, even if it means taking a small loss. That raises cash to buy back on dips (averaging down). If the market does not correct, adding the loss to the remaining shares will allow for getting back to even once we have a decent rally. I day trade constantly to reposition. Not everyone can day trade, but overnight traders almost every day have a rally to sell into, and can buy back later that day or the next, on any weakness. This prevents having to make the hard decision of whether to hold or liquidate a large loss.

I prefer selling on a small rally over selling on a low. I almost never sell out at the bottom because that is where I am buying. But anytime I need to sell to sleep, I do it. If you dump out at 42 in NUGT and it drops to 30, you can buy back cheap or wait till it comes back to your price on the way back up. It would save going through the great abyss. Not everyone thrives on catching falling knives like I do. I can't tell anyone else how they should trade. I can only say that I am committed to riding this turkey NUGT through 30 if necessary, so when it doubles on the way back up, I can finally reach my 61 target. I have another traunch or two of cash, so even if NUGT goes to 20, 10, or 5 again, I can recoup my money. The lower it goes, the more I plan to make. I only keep 400 NUGT core shares and have 800 trading shares to continuously bail myself out. I am willing to lose the entire 400 core shares if necessary. I will not allow any losses on the trading shares beyond 48 hours without dumping half on the close, as I previously suggested. So far my trading shares are in fact up several thousand dollars in profits, more than making up any losses I have in the core shares. It is called money management and it keeps me liquid and it helps me get through the tough times, like now. Not everyone can have several accounts or several traunches of cash. But everyone can divide their trading capital in half and keep half their money in cash or trading in a less speculative instrument, so that at no time are they fully invested in an extreme losing trade. If one finds themselves in that position, prudence dictates liquidating half their position immediately on any small rally to preserve capital.

Disclosure: I am long NUGT.