Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

HUI Gold Stocks Index leverage against Gold Price

Commodities / Gold & Silver Mar 30, 2007 - 06:29 PM GMT

By: Roland_Watson

Commodities

Some weeks back we looked at how the HUI index of unhedged gold producers was leveraging the price of gold. As any seasoned gold investor will know, well chosen gold mining stocks offer gearing on the rising price of gold up to many times depending on the quality and timing of the stock chosen.

However, since 2004, the HUI has failed to live up to that tag as its performance against gold has increasingly diminished until recently. To this end, we present the latest on how the HUI is doing against its main product.


As before, we calculate a rolling four year leverage to best display how this basket of gold stocks is leveraging gold. A four year period was chosen because it smooths out any volatile price moves and represents the typical time that an investor may hold onto stocks during such a bull market. The graph below gives the current state of play.

As you can see, the HUI hit a peak of leverage against gold on the 19th November 2004 when over a four year period it had outperformed gold by a factor of 3.92 or a near 400% return over gold. No wonder people like gold stocks you may say.

However, for reasons not quite understood, that four year leveraged return began to drop to the extent that even silver began to and still does outperform the HUI index. A bottom of about 1.10 was hit in May 2006. In other words, someone who broadly invested in the HUI stocks four years earlier in May 2004 by May 2006 had seen his portfolio return a meager 10% over the price appreciation of gold. Not quite what we would call aggressive leveraging.

Various fundamental reasons have been offered for why this shocking performance has come about. Rising energy and infrastructure costs have been suggested. Others have said that rising geopolitical tensions have made HUI companies based in not so friendly countries less attractive to investors. Finally, the rise of gold ETFs and their accessibility to stock-based mutual funds has no doubt seen money traditionally intended for stable gold producers diverted away.

Whatever the reasons, the leverage numbers reflects this malaise. So what now? A look at the chart confirms the bullish sentiment I gave at the time. If we draw a trendline down from the top of the graph, there was a breakout in August 2006. At that point the HUI was dropping to 300 and less as it continued to correct its 400 high.

This breakout buy signal has been confirmed in the intervening months as the HUI leverage consolidates in the 1.25 to 1.60 range. Will it drop any further? I say that is next to improbable if not impossible. For the HUI leverage to drop back below the downtrend, it would have to drop below 1.0. In other words, the basket of HUI stocks would have to be under-performing gold. That to my mind is not feasible in a rising gold market. I think investors can continue to regard the period since the leverage breakout as a buy zone for gold stocks.

The final confirmation will come when the HUI leverage rises and stays above its 200 day moving average. When that happens expect the leverage that gold stocks deliver over gold to start increasing.

By Roland Watson
http://silveranalyst.blogspot.com

Further analysis of the SLI indicator and more can be obtained by going to our silver blog at http://silveranalyst.blogspot.com where readers can obtain the first issue of The Silver Analyst free and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk .


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in