GDXJ: How Much Upside is Left?

I’ll touch on the short term in this report but the main purpose is to take a step back and put the current powerful rally in mining stocks into perspective well into the future. As you can see from the daily chart below, GDXJ has doubled in price in just 90 days to kick off 2016:Even though the bullish action has left tentative buyers in the dust, junior gold miners via GDXJ have only touched into slightly overbought territory a few times. So, even though the move has been significant, there seems to be a stealth component to the action.If you have been a premium Gold Investment Letter member, you have heard me preach steady accumulation in the gold, silver, and junior mining sector for over a year. In Q4 2015, I amped up my position and encouraged investors to bolster holdings in our favorite juniors. This conviction wasn’t just from the gut, but from the amazing data referenced below. The problem folks have now is pulling the trigger and buying into the precious metals sector after such a big move higher. However, I will show you why that is a mistake.Earlier this year, gold stocks bottomed on January 19th. The Barron’s Gold Mining Index was trading at the same level as it was 42 years ago! The BGMI relative to both gold and the S&P 500 was at its lowest level in 90 years and the recent almost 5 year bear market was itself the worst in 90 years. The Hui/Gold Ratio bottomed in January at .09 but its long term median level is .35. With the ratio now back at .16, it still needs to more than double just to get back to its median and this assumes gold stays flat. But we all know that in volatile sectors such as gold/mining stocks, the median is virtually always busted through on swings up and down.Make no mistake, this sector was utterly bombed out by the time it bottomed in January. If gold hits $1,550 per ounce, the miners will need to triple to return to the median HUI/Gold Ratio and for bulls that think $2,000 an ounce gold is in the cards down the road, we’re looking at a 550% rise in the miners if the ratio goes back to its highs of .636. Another data point is that the gold miners need to rise another 80% for the HUI/S&P 500 Ratio to return to its long term median of .174 and 450% for it to return to its historical time high of .544.Regardless of the compelling data, many investors after years of seeing mining stocks roll over and being punished for buying, are very skeptical. At the turn of every bear to bull market, this is normal, but recognizing the true turn and taking action early can mean the difference in making millions versus just hundreds of thousands of dollars. Losing heart at exactly the wrong time is a common loser’s mentality, but something that can be changed in an instant for those that are willing.If you fear that you are chasing too much after soaking up the daily GDXJ chart above, take a look at the monthly, over a 10 year period:Clearly, we are veryyyyyyy far from the 2011 highs! We would need to see a 5 bagger from current levels to hit the low $150’s. But, keep in mind that with the thinned herd of survivors in the sector, if gold breaches the 2011 highs, GDXJ could see new highs ultimately as well. The monthly downtrend line was just breached in March and it is good to see a confirmation month or two before christening an official breakout. But, that is what we have here, a brand spanking new bull market that should last multiple years.Because gold is really an opposite reflection of the currency we view the world in, the action varies based on where you live. For Brazilians, Russians, Canadians, etc, gold has been ripping since early 2015. As I type, spot gold is $1,555 an ounce in Canadian dollars, and is up over 85% the last 5 years in Brazil. The USD strength the past couple of years has masked the gold bull but we’re now poised to see a very strong run in gold priced in US dollars. For a real perspective that most people aren’t aware of, let’s consider what the global paper currencies have done against gold since 1971, when gold officially decoupled from the dollar. In 1971 gold was $35 an ounce. Now it is approximately $1,240, an almost 3,500% gain over 45 years (inversely, it has been a massive fall in the value/purchasing power of the US Dollar).In the early 1970’s, 14.5 British Pounds bought one ounce of Gold. Today, 888 Pounds buys it, a rise of nearly 6,000%. In Canadian Dollars, from C$38 to $C1,555 for an over 4,000% rise. The USD has actually outperformed its British/Canadian counterparts (purchasing power declined less). Keep in mind that this 3,500% rise for Americans in Gold included a brutal 20 year bear market from 1980-2000. So, the British Pound has lost 98.4% of its value since 1971 while the USD has lost 97.2% of its value in Gold. If Gold hits $3,000 an ounce in USD, we would basically match the Pound decline in percentage terms (98.8%). If Gold hit $10,000 an ounce it would mean a 99.65% loss in USD value but at some point, a fall of this magnitude is certain, because every paper currency unbacked by Gold goes to ZERO over time.We have heard for years in the US how tame inflation has been. But, stretching back about 30 years on memory, I recall buying candy bars for 25 cents. What are they now…$2? This is the ultimate function of Gold, to remain a store of value/savings over long periods of time. The value it commanded a century ago (give or take), buys the same amount of comparable goods today and will remain so. NIRP (negative interest rate policies) taking effect in various nations around the globe will only stimulate demand for gold and silver. The just over 40% decline in the price of Gold from high to low into 2016 and the almost 90% decline in mining shares sets up a powerful pendulum for GDXJ. Remember, just a basic reversion to the mean will see gold miners double again from here and other historical metrics indicate the upside could be even greater.Certainly, a shakeout will come to the sector eventually. Nothing goes straight up. My hope is that the bearish action in the weekly chart below shows us a correction could occur now for a few weeks. We’re finally overbought a bit, hitting resistance, and saw a big fade from the highs last week.I say “hope” because I know a lot of people have missed this move. Personally, I want to load up even more on the first meaningful correction that we see in my favorite names. Make no mistake, the bell has rung, we are in a new cyclical gold bull market, and gold, silver, and mining stocks are going much higher. We’re monitoring the short term action in GDXJ closely but feel strongly that meaningful pull backs should be bought. There is much money to be made trading in a bull cycle but the big money is made by buying in early and sitting. Our 18 month target on GDXJ is $70 and within 36 months we believe 2011 highs near $150 per share will be tested.For updates on GDXJ and unique ideas on individual mining stocks, please sign up for our free newsletter below.