After getting crushed, this sector could be golden

It's been a terrible year for gold miners, with the Market Vectors Gold Miners ETF (ticker symbol GDX) getting demolished to the tune of nearly 50 percent while the S&P 500 has sailed 26 percent higher. But precisely because the gold miners have become so universally hated, some investment advisers and chart readers suggest that it's time to dig in.

"This is the trade that nobody wants to have on," said Larry McDonald, U.S. credit, equity and policy strategist at Newedge. "I don't think it's any question that they're the most undervalued sector right now."

McDonald points out the sharp divergence between miners and the market not just in performance, but also in key valuation metrics.

"On a price-to-book basis, the gold miners are much cheaper than the market," McDonald said. "And the GDX is yielding more than the S&P."

(Read more: Gold falls as equities rebound, physical demand dips)

McDonald thinks the gold miners will rise to close some of that gap. And according to Oppenheimer's chief market technician Carter Worth, the charts are also pointing higher.

"GDX has all the hallmarks of something that's stabilizing, basing," Worth said Friday on CNBC's "Options Action."

He said that the ETF has been trading in "as well-defined a downtrend as you could possibly find in the market."

"What is key," Worth said, "is the move above the downtrend that occurred basically four months ago. And then we visited the line again, but held, and held again."

To him, that indicates that the bottom is in.

"It has all the look and feel of a well-defined bearish to bullish reversal," Worth said. "So we like these here. We think you have all kinds of asymmetry. Downside is quite limited, and upside potential is very high."

McDonald similarly believes that the miners could have a great deal of upside—particularly if Janet Yellen proves to be an even more dovish chair of the Federal Reserve than expected.

"What if Yellen surprises everybody and expands QE for one or two quarters? That's the black swan, and nobody has that on their radar," said McDonald, who writes at "These miners would be up 50 percent if they expanded QE."

(Read more: Christmas taper coming? This week will drop a hint)

Still, McDonald suggests putting on a pairs trade rather than simply going long.

"We are recommending that clients be long the GDX and short the S&P," McDonald said. "Even if they do taper early, miners will lose 6 percent, and the S&P will lose 16 percent."

—By CNBC's Alex Rosenberg. Follow him on Twitter @CNBCAlex.

Follow the show on Twitter @CNBCOptions.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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