Possible breakout in gold?

HUI & Spot Gold, year to date, June 1st 2012

HUI & Spot Gold, year to date, June 1st 2012

The chart above shows the year to date performance of both gold (the area curve) and HUI, or the NYSE Arca Gold BUGS (basket of unhedged gold stocks) Index which is displayed as a black line. HUI consists of the stocks of mining companies that do not hedge their production, and therefore represent an excellent forward looking view of spot gold prices. As you can see, generally HUI and the spot price of gold track each other very well, since May 14th we’ve started to see a divergence in prices.

I previously wrote about this divergence, mentioning that HUI and spot gold generally track each other very closely and I was seeing changes in forward looking correlations. Since I wrote that post two weeks ago, HUI has risen 3.01%, while spot gold has dropped 1.16%, furthering the divergence. When HUI diverges, particularly to the upside, these price changes represent the view of investors who expect the price of gold to rise. By purchasing HUI these traders are making a leveraged play on the future spot price of gold. We say leveraged since they’re not purchasing gold itself, rather shares of companies that produce gold, and they expect the price of gold to increase. Keep in mind this isn’t a short term indicator, and we may see further weakness in spot gold but as long as HUI continues to diverge, the greater the changes of a short move up in the price of spot gold.

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