Over the past couple of months, I've received numerous messages from subscribers and seen many social media comments expressing frustration that gold and silver mining stocks have been under-performing the metals themselves, even though in theory they should provide leveraged exposure to metal prices. In today's analysis, I'll explain why this under-performance has occurred, and more importantly, why I believe that dynamic is about to change, with miners now set to outperform the metals from this point forward. To better understand this analysis, I recommend first reading my recent bullish thesis on precious metals mining stocks.
Let's first get an overview of the situation that many investors have been lamenting, starting with the ratio of gold miners (using the GDX large-cap miners ETF) to the price of gold over the past six months.
As the chart below shows, from July to September, gold miners had a rare period of out-performance relative to gold, as the mining stock bull market started to heat up. But they began to stagnate relative to gold starting in October, until the past couple of weeks. As I will explain throughout this analysis, however, I believe gold miners are about to significantly outperform gold once again.
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The situation has been even more pronounced in silver miners, as shown in the chart of the ratio of silver miners (using the SIL large-cap miners ETF) to the price of silver over the past six months. Although silver miners experienced a brief period of out-performance relative to silver from August to mid-September, they have since lagged behind, failing to provide the expected leverage to the metal's price.
One comment I saw on X summed up the frustration: why invest in silver miners for leverage when you could simply use margin on a silver ETF like SLV or buy silver futures?
And I can't say I blame the poor guy. However, I believe silver miners are about to enter an extended period of out-performance relative to silver once again, as I'll argue throughout this analysis.
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My explanation for the recent under-performance of gold and silver miners relative to the metals themselves is that they have been held back by a strong resistance level that formed at the mid-October peak. However, I believe that is about to change in a significant way following today's breakout in all four of the popular mining stock ETFs that I track.
Let's start with the VanEck Gold Miners ETF (GDX). As I've been highlighting in recent weeks, it had been trading in a range between support at $68 and resistance at $84. Today, it finally broke above that resistance on solid volume. While the volume could have been stronger, I believe that is likely to occur over the next few trading sessions. It's important to remember that breakouts are often a process rather than a single binary event, and they typically unfold over several days as more buyers step in.
Read my recent tutorial to understand why volume is important for confirming breakouts.
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The VanEck Junior Gold Miners ETF (GDXJ) shows the same setup as its larger sibling, GDX, with a solid breakout today above the key $112 resistance level on healthy volume.
I'm not fretting the fact that volume on today's breakout isn't as strong as it could be, as that's not too surprising given that gold is just starting to wake up from its recent slumber and hasn't fully broken out yet, as I explained in this report. I believe this early breakout in gold miners is a very good start, and I'll be looking for additional strong buying volume over the next few trading days to fully hammer this breakout home.
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Next, let's take a look at the Global X Silver Miners ETF (SIL), which also broke above its $80 resistance level today on respectable volume. As I explained here, silver is just beginning to break out, so I expect SIL and silver miners in general to follow suit, with additional buying volume likely to come in over the next few days.
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Finally, let's take a look at the Amplify Junior Silver Miners ETF (SILJ), which represents smaller, more volatile silver miners that offer the greatest leverage to the price of silver. This ETF also makes up the bulk of my mining stock-related holdings.
Today, SILJ delivered a textbook breakout above the $27 resistance level on very strong volume. The previous two trading sessions also saw significant volume, which adds further confirmation to the breakout. During today's move, I was monitoring both the intraday chart and the time & sales feed (or what old-time traders called "the tape"), and I observed a steady stream of large block buy orders throughout the day. That gave me confidence early on that it would be a powerful breakout and, in my view, the start of a much more extensive rally.
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Using the measured move principle that I often apply, we can estimate how high gold miners are likely to climb during this new rally. By measuring the rally ($32) that led into the triangle pattern that formed in October and November, then projecting that move upward, we arrive at a short-term price target of around $110 for GDX, which is about 28% above today's price. The GDXJ Junior Gold Miners ETF is projected to rise by a slightly higher percentage due to its greater leverage and volatility, but the overall message remains the same.
Keep in mind that this is only a short-term target. I expect gold miners to rise much further over the course of their secular bull market, which, based on historical trends, should last at least another seven to eight years (learn more).
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Using the measured move principle, the SIL Silver Miners ETF is projected to rise to approximately $109, which is 31% above today's price. The SILJ Junior Miners ETF is expected to post a similar gain, although I wouldn't be surprised to see it climb even higher due to its greater leverage and volatility compared to the larger-miner-focused SIL.
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As I explained in my recent report on gold and silver miners, these stocks have become extremely undervalued relative to the underlying metals when compared with historical norms. In addition to my bullish expectations for the metals themselves, my thesis on miners also hinges upon their very low valuations, which I expect to return to historical norms. This will cause mining stocks to rise significantly in price even if gold and silver were to remain flat over the next few years (which I don't expect, of course).
The undervaluation of mining stocks is confirmed by numerous metrics, but today I want to focus on the ratio of the Philadelphia Gold and Silver Index (XAU) to gold. The XAU is the oldest index of precious metals mining stocks, which is why I'm using it in this example. However, it is highly correlated with GDX, so the two can be used interchangeably for this type of analysis.
The XAU-to-gold ratio is currently sitting at just 0.08-only a fraction of its historical range between the 1980s and mid-2000s, when it averaged around 0.28. This implies that, if the ratio simply returns to its historical norm during this bull market, gold and silver mining stocks would roughly quadruple from current levels. A key sign that mining stock valuations are poised to take off will be a decisive breakout above the 0.09 resistance level in this ratio.
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Another factor I see as extremely bullish for junior miners in particular is the recent breakout in the Russell 2000 small-cap stock index, following a prolonged period of under-performance relative to large-cap stocks, as represented by the S&P 500.
Over the past few days, the Russell 2000 has finally broken above the 2,300 to 2,500 resistance zone that had capped its gains since 2021. I believe this breakout marks the beginning of a broader bull market in small-cap stocks, which should prove particularly beneficial for junior and micro-cap mining companies in the years ahead.
To learn more about support and resistance zones, I recommend reading my two-part tutorial on the topic (Part 1 and Part 2).
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The chart below of the ratio of small-cap stocks (the Russell 2000) to large-cap stocks (the S&P 500) shows that small caps have significantly under-performed large caps over the past decade. However, the pendulum may be about to swing in the other direction, following the Russell 2000's breakout this week above the 2,300 to 2,500 resistance zone that had acted as a ceiling since 2021.
This move comes alongside falling interest rates, which are particularly beneficial for smaller companies, as noted in a Barron's article published yesterday. In addition, according to FactSet, earnings for the Russell 2000 are expected to grow 35% annually over the next two years, compared to 14% for the S&P 500. Small caps also have much lower valuations, with the Russell 2000 trading at a price-to-earnings ratio of 18.92 versus 27.80 for the S&P 500.
Another point I want to mention is that many investors who have been noticing and complaining about the weak performance of small-cap mining stocks may not realize that this stems in large part from the broader under-performance of small caps over the past decade, and it is not limited to the mining sector. As I mentioned earlier, that trend looks set to change, which is one of the reasons why I'm heavily positioned in the SILJ Junior Silver Miners ETF instead of the large-cap alternatives.
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Finally, for further confirmation of my bullish outlook on junior miners and small-cap stocks, I want to share the chart of the S&P/TSX Venture Composite Index. This is a broad market index of Canadian micro-cap securities, many of which are junior gold and silver miners. In line with the broader stagnation in small-cap stocks, this index has spent more than a decade trading in a range between support at 400 and resistance at 1,000.
The index is now approaching a breakout, and I believe it will happen soon. When it happens, I expect it to mark the beginning of an explosive bull market in junior gold and silver mining stocks, with juniors strongly outperforming their large-cap counterparts. This is a very exciting setup that I'm closely watching and waiting for.
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In closing, with today's breakout in mining stocks and the early signs of renewed momentum in precious metals themselves, I believe mining stocks are poised to end their period of soggy performance and begin a significant surge, outpacing the metals themselves, as they typically do during secular precious metals bull markets. Due to their extreme undervaluation and leverage to metal prices, mining stocks are among the few investments with the potential to generate life-changing wealth in the decade ahead.
This will attract the envy of tech stock investors, many of whom will see their overinflated favorites stagnate and eventually slip into a devastating bear market. As the tech hype fades, a large share of capital will flood into precious metals and mining stocks, pushing them to levels that even most gold and silver bulls can hardly imagine.
This is a post from Jesse Colombo’s The Bubble Bubble Report—a bestselling newsletter focusing on precious metals investing and global economic risks. We specialize in detailed reports and analyses.