Gold stocks, what an opportunity

Spot gold and HUI, Jan 1st 2012 to May 11th 2012, daily

Spot gold and HUI, Jan 1st 2012 to May 11th 2012, daily

I’ve previously written about the divergence in the price of gold and HUI, the so-called gold bugs index. They should track each other very closely, as the companies comprising HUI mine and sell gold. As the price of gold goes up, everything else remaining constant of course, their profits should rise.

Looking back three years, from March 6th 2009 to January 1st 2012 both gold and the HUI rose 68% and 74% respectively, with a very strong correlation of 0.98 . The correlation later broke down, falling to 0.66 as prices sharply diverged, but now, as the chart above shows, correlations have strengthened.

Whats this mean going forward? Many analysts tend to believe the correction in gold – and presumably HUI – will continue. I’ve previously written about seasonality in gold; historically, we’ve seen very low returns in the second quarter. Jim Rogers thinks spot gold will continue to fall and bottom at around $1,100 a ounce before rebounding. Presumably HUI will follow suit.

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