GDX: 2008 All Over Again?

London (Dec 18)  Summary•The Gold Miners Index is more than 40% off its 52-week highs.

•It is on pace for its most precipitous drop since 2008.

•Many gold producers are still highly profitable at $1,130 / oz.

After a strong month of outperformance for the Gold Miners Index (NYSEARCA:GDX) relative to gold (NYSEARCA:GLD), the index is now back to its old ways. During a week when the price of gold fell 2.75%, the Gold Miners Index dropped by nearly 8%. Both gold and the gold miners are now down 8% since the week of November 11th, and the positive divergence in the GDX no longer exists. Yellen's hawkish statements last week ripped the tiles off the GDX's $20.00 floor, and the index has now broken another support level. Fortunately for gold investors, there are two silver linings that emerge from this most recent breakdown:

1) The gold bears are now feeling invincible, and continue to add to their shorts. Short interest in the majority of gold majors jumped by 5% last week, despite a steep decline in the index.

2) The best in breed gold producers have been thrown out with the bathwater, and are now trading at very attractive valuations.

The last time the miners experienced a drop this precipitous, it was the end of the world in late 2008. The S&P-500 (NYSEARCA:SPY) dropped 40% over 4 months, and the Gold Miners Index was not spared, plunging 56%. The current 4-month return for the GDX is (-) 38%, and we are experiencing the 2nd most steep drop since the index's inception. The big difference between now and 2008, is that this is not the end of the world. The S&P-500 is at all-time highs and up 10% the past 4 months, and financial markets are not in turmoil worldwide. Anything is possible and this correction could continue, but the current rate of decline is not sustainable. The index is currently dropping at a pace of over 10% a month, despite the fundamentals on many gold producers being the best they have ever been.

Source: SeekingAlpha