Gold Mining Crash: A Big Buy?

[The Machine]

 

 

Maybe. Things could hardly get worse according to history…

WHEN has a market bottomed?

When is the right time to get in after a spectacular crash? asks Steve Sjuggerud in his Daily Wealth.
 
The short answer is that no one really knows.

Calling bottoms is hard. And doing it consistently is nearly impossible.
 
Just because something is down a lot doesn't mean it's set to rise today. But major crashes often do lead to massive gains in the future. I think this is exactly what's happening in the mining sector right now.

Mining stocks have crashed 64% in the past 18 months. We've only seen declines that extreme three other times since 1974. And each of those led to massive returns.

Let me explain.
 
As I said, mining stocks are down 64% in just 18 months. That's according to Datastream's World Mining Index, which includes big names like Rio Tinto, BHP Billiton, Glencore, Anglo American, and Vale.
 
Mining stocks have only crashed to a similar degree three other times over an 18-month period. The last occurrence was in 2009. Take a look...

Each arrow in the chart above represents a similar decline over an 18-month period. But none is as extreme as the 64% decline we have today.
 
This doesn't mean a rally has to start right now. But these kinds of crashes set the stage for massive returns. The table below highlights the returns after each past occurrence shown in the chart above.

History shows that big gains are likely after extreme crashes. The average three-month return was 24%. And 77% gains were the average after one year. We'd be foolish to ignore this trend.
 
I've been buying mining stocks for my personal account. (I'm using trailing stops to protect my downside.) There's no way of knowing if this is the exact bottom. But after a decline like this, the risk/reward opportunity looks good to me.
 
If you're able to take a bit of risk today, consider buying mining stocks. The mining sector has absolutely crashed. And history says triple-digit returns are likely over the next couple of years. That's enough to have me interested.