Gold Miners Zoom

By Ron DeLegge

March 31, 2014 at 08:00 PM

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The tremendous rebound in gold mining shares has been a pleasant surprise for gold bugs.

From 2011 to 2013, ETFs tied to large-cap gold mining stocks (GDX) lost 79%, while small-cap miners (GDXJ) fell 111.58%. Yet, after consecutive yearly declines for both GDX and GDXJ, a significant bounce was almost inevitable.

At the end of last year, bearish sentiment toward precious metals was at extreme levels and overdue for a reversal. The SPDR Gold Shares (GLD) slid 28% and the iShares Silver Trust (SLV) crashed 36%, leaving a bad taste in investors' mouths. In retrospect, it was an ideal time to pick up beaten down shares on the cheap.

A research piece at ETFguide published on 12/26 said: "This year (2013) will be the third consecutive year of losses for gold mining stocks. But once year-end tax loss selling is over, we're anticipating a bounce in beaten down gold miners in January. It remains to be seen whether this bounce will become a bigger trend change for GDX from down to up, but it's nevertheless a short-term profit opportunity. We're buying the Market Vectors Gold Miners ETF (GDX) at $21."

Gold miners are definitely not for the faint of heart. The sector has typically had around twice the volatility of gold bullion.

But thus far, the bounce in miners has been so great—they're now collectively outperforming the S&P 500 year-to-date. And if the recovery in precious metals strengthens, more gains are likely ahead for gold equities.

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