Opportunity in gold stocks?

Spot price of gold and the HUI, daily, March 6th 2009 to May 3rd, 2012

Spot price of gold and the HUI, daily, March 6th 2009 to May 3rd, 2012

Something curious is happening with gold stocks; the chart above shows the daily price of gold (black line) and an index, HUI, that tracks the performance of a basket of gold mining companies (red line) from the start of the current bull market, March 6th 2009.

From March 6th 2009 to January 1st 2012 gold was up 68%, the HUI up 74%, and both moved very closely together, exhibiting a correlation of 0.98 . However from January 1st 2012 to May 4th 2012 gold is up 4.67% while the HUI has lost over 15% and the correlation has sharply slipped to 0.64 . What’s going on?

Well, the HUI (aka, the “gold bugs index”) is designed to track the near term performance of gold. It consists of 15 of the largest and most liquid gold mining companies that DO NOT HEDGE their gold production. In other words, these companies, believing the price of gold will go up in the future, don’t sell their production now, for future delivery, to lock in a price TODAY. Not only is the HUI sharply declining in price, it also is diverging from gold as the metal has risen over the past year. HUI seems to have been impacted by an overall flow of money OUT of equities and into fixed income assets, a trend I’d previously written about.

The fundamentals underlying gold remain bullish; the US economy is slowing sharply and with unemployment still at historic levels and the European economy is still very weak with nation after nation slipping back into recession. Can further stimulus be far off? I don’t think so and any economic stimulus would be bullish for gold and, ultimately, gold mining stocks.

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