Gold Stock Investing & Current Gold Prices
Greg Silberman CA(SA), CFA (Retired)
The close correlation between the Dow and the Amex Gold Bugs Index severed dramatically this week. Is this a short-term aberration or a sign that Gold Stocks are entering another exhilarating up leg?
Since June the correlation between Gold Stocks and the Dow Industrials had been incredibly close. The two markets have literally moved tick for tick:
Chart 1 - HUI (top) and Dow (bottom) moving tick-for-tick; HUI: INDU ratio bottom
Then suddenly, the HUI burst higher in dramatic fashion whilst the Dow got slugged lower. All of a sudden the HUI has come to life versus the stock market (bottom of chart).
The short-term answer to this sudden and dramatic divergence is that the US Dollar Index broke key support at 80. But it does beg the question, is this an aberration and Gold Stocks will soon join the stock market by moving lower or is this the beginning of the next up leg in Gold Stocks?
We are quietly confident that it is the latter (ie the beginning of the next up leg in Gold Stocks).
Chart 2 - HUI: Gold ratio (top); S&P500 (below)
During August's stock market sell-off we noticed an interesting trend. As stocks got pummelled, the price of Bullion remained firm relative to Gold Stocks. We're not sure exactly who put on such a spread (perhaps hedge funds) but it seems a popular trade was to buy Gold Bullion and sell Gold Stocks possibly as a hedge.
This trade gave rise to a very interesting juncture in the HUI: Gold spread (chart 2). To recap, the reason we place a lot of emphasis on this ratio is because of its outstanding performance during 2001 - 2003. This was the last BIG run-up in Gold Stocks where they performed handsomely against Gold Bullion and a plummeting stock market. We feel a similar trend is required to catapult Gold Stocks into the next MAJOR up leg.
The sell-off in August caused the ratio to move down to rechallenge important support at 0.45. This level of support has been in play for over 3 years and it is obviously an important line in the sand.
The recent strength in the HUI versus Gold is highly significant as it signifies that support at 0.45 has held yet again and that the HUI: Gold ratio should bounce higher.
Sure there is a lot of work still to do, but the long awaited break in the US Dollar has occurred and the dramatic divergence in the HUI versus the Dow is extremely promising. As we showed in Gold Stock Market Quote is screaming BUY, all the pieces are now in place for a Golden 2008.
More commentary and stock picks follow for subscribers…
Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
September 8, 2007
I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.
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Click here: http://blog.goldandoilstocks.com
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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