Gold mining stocks have done well lately.  As gold has stayed above $1,200 per ounce and flirted with $1,300, gold stocks have done even better.  This is typical, as the mining stocks are leveraged and tend to be far more volatile than the price of the metal.

Now we need some context.  If you had bought shares of the VanEck Vectors Gold Miners ETF (symbol: GDX) one year ago, then you would be doing well.  If you had bought it five years ago, you would still be down by a whole lot.

If you had bought GDX in January 2016 at a low of about $12.47 per share, then you would have doubled your money as of today, with the share price sitting just below $26.

This shows the volatility of mining stocks.  GDX is not one stock that happened to have good news.  It is like a mutual fund, made up of many mining companies.  The gold price is up less than 20% so far for the year.  Meanwhile, this gold ETF has nearly doubled.

So the big question is whether this whole move in gold mining stocks is a fake out, or whether it will continue.

Of course, nobody can predict the future when it comes to pricing securities.  But we can look at the driving forces, both up and down.

The big threat to the mining sector is a deep recession.  Virtually all stocks were hammered in the fall of 2008.  Gold and gold mining stocks did recover with the rest of the market in 2009 with the Fed’s aggressive monetary creation.

In a recession, cash is king.  Or maybe bonds are temporarily king.  But unless it is a recession within a high inflationary environment (think 1970s), then cash and bonds are typically the winners.

Still, I find it interesting that gold surged upward in January 2016 when stocks were taking a tumble and scaring investors.  It seems that all rules are being thrown out the window in today’s environment.  So it wouldn’t completely surprise me if gold prices, and maybe even gold stocks, actually held up in the face of a recession and falling stocks in the general market.

The good performance of gold stocks in 2016 may just be a matter of getting back a little of what was lost in the previous 5 years.  Gold stocks were an absolutely terrible investment from 2011 to early 2016.

GDX was briefly above $60 per share in 2011.  So even with the big run in 2016, it is still less than half of its all-time high.

Generally speaking, I am favorable towards gold mining stocks right now, but I still think it should be a relatively small portion of one’s portfolio just because of the risk.  A recession, which I see as likely in the near future, is a real risk, but I think gold stocks would survive better than in many past recessions.

If we keep muddling along, then gold stocks will probably do the same.  We might see more gains, but they won’t be astronomical by any means.

The one thing that would really set gold mining stocks on fire is if the Federal Reserve announces another so-called quantitative easing program.  This means that the economy would likely have to get much worse first.  But another injection of money by the Fed might be the catalyst to scare people away from the U.S. dollar and into hard assets, particularly gold.

If the gold price can go up less than 20% with GDX doubling in price, imagine what the mining stocks would do if the gold price went up 50%.  Those would be some serious returns.

That is why I like gold mining stocks, but with the disclaimer that they are very risky.  While they can easily lose 75% in a bear market, they could also gain 500% or 1,000% in a renewed gold bull market.  Those are gains to get excited about.