Does HUI Always Lead Gold Bullion?
Jordan Roy-Byrne
With gold hitting a seven-month high, you would expect investors and the business media to be giving praise to the ancient metal of kings. While many are not talking about gold, those that are continue to raise caution and skepticism at the fact that the gold stock indices (HUI, XAU, GDM) have lagged gold. The idea is that the stocks will lead the commodity. While this was the case for most of the first phase of the bull market, the second phase has witnessed the metal leading the shares higher. Behold this chart of the HUI:
There are three points I highlighted with a vertical line. Each point demonstrates that the metal has led the shares.
At the first point in September of 2005, gold has reached a new bull market high, while the HUI peaks below both of the 2004-2005 consolidation peaks. Shortly thereafter at our second point, gold has bottomed above its 2004 high, while the HUI has bottomed well inside the boundaries of its 2004-2005 consolidation. After the bottom, gold immediately hits new highs while it takes the HUI five weeks before it breaks above its 2004 high and the consolidation of 2004-2005. During the 2005-2006 run, gold hits its first new high in September. It takes the HUI roughly 11 weeks before it hits its first new high.
Finally the last point shows September 06, in which gold is heading lower while the HUI is less than 10% away from its May 2006 high. I remember at the time how bullish I was because the shares were showing tremendous relative strength against the metal. Gold continued lower and the HUI followed, plunging 31% in less than a month!
We can clearly see that in this second phase of the bull market (which began in May 2005), gold has led the HUI. Now why is this the case? I have a few ideas. First, the first phase of the gold bull market was more of a dollar bear market than a true gold bull market. Gold rose strongly in dollar terms but priced against other currencies gold only increased slightly. Since May of 2005, the price of gold has exploded in every currency. What all this means is that there has been a lot more foreign buying in this phase. I would posit that foreigners have more of an affinity for gold the metal (think China and India) than the various gold companies. That is one reason why gold may be leading the gold stocks.
Secondly, consider investor psychology during the three phases of a bull market. In the first phase, most investors do not know a bull market is going on. If they notice, they won't acknowledge it as a bull market. "Gold? Oh that's just up because of 9-11 and terrorism." In the middle phase (also known as Wave III) sentiment starts out skeptical and ultimately becomes exuberant and finally manic in the final phase of a bull market. When sentiment moves from skeptical to exuberant, you experience that 3 of III and that point of recognition.
For now sentiment is still skeptical. When market sentiment is skeptical you would expect to see the gold stocks lagging the metal or not reflecting the true price of the metal. Remember in 2006 when analysts would say that the oil stocks are only discounting $40 oil and not $60? Now if sentiment was exuberant you would expect to see the market valuing the gold stocks at a gold price that would be higher than the current price. That is because the market would be expecting gold to rise. We will expect to see this sort of thing occur as the bull market gets longer in the tooth.
In summation, we continue to be very bullish on gold and do expect the HUI to rise in tandem with gold. In hopes of taking advantage of gold's strength, we are emphasizing the junior miners and the various stocks that are showing the greatest technical strength.
16 February 2007
Jordan Roy-Byrne
Trendsman Newsletter
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