Is It Finally the Time to Buy Gold Miners?

Gold miners have been weak for years, but it could be time to jump in.

Granted, they have long been a value trap. Many observers, including myself, have touted the cheapness of miners relative to the price of bullion. It’s been true for a long time and lured traders into the group early, but now could be a propitious time to try again because the risk/reward profile seems particularly favorable at current levels.

The classic comparison is between the Market Vectors Gold Miners exchange-traded fund (GDX), which tracks the miners, and the SPDR Gold Shares ETF (GLD), which follows the price of the metal itself. The GDX has risen less than 3 percent in the last five years, while the GLD has more than doubled. The disparity is even greater in a 12-month period, with the GDX losing 15 percent of its value. Gold has been up slightly in that time, while the S&P 500 has rallied 16 percent.

Recently, however, we have seen a trend of stocks in the materials sector bottoming out: U.S. Steel, BHP Billiton, Vale, Rio Tinto, and Alcoa are among them. Even Freeport-McMoRan is holding its ground after last week’s gut-wrenching drop. And, when the broader market tanked in mid-November, many of those stocks came back quickly and proceeded to make new highs.

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— Option Monster

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