Gold Bugs Confident

Statistically speaking, gold stocks remain strongly correlated with gold. All markets breathe (ebb and flow). Unfortunately, emotions often distort perceptions. Investors’ reactions to short-term ebbs (under performance) can distort the reality of long-term flows (out performance). The HUI, excluding dividends (a big exclusion), has risen from 73.77 to 497 since 2001. Gold, however, has risen from 282 to 1540 over a similar period. The gold shares, while largely ebbing since 2004, continue to out perform.

Historical Correlation: Gold Stocks and Gold

Most investors will be left wondering what could have been when ebb inevitably turns to flow as the cycle matures.

Jesse’s Café Americain expresses one theory: “It looks to me that there is a paired trade going on, of long bullion and short miners. … If the stock market falls apart, the miners are much more vulnerable to a sell-off than bullion. That is the reason for the paired trade I believe.”

“Trader Dan” Norcini suggests a contributory factor: “The gold and silver ETFs are also partly to blame, in that these Trojan Horses have siphoned off a huge amount of speculative money flows that otherwise would have found its way into the mining-sector shares.”

Norcini is inclined to see malign motives behind the selling pressure.

Given its high-altitude perspective, the Aden Report felt able to offer some comfort on Friday evening: “XAU fell to a new low for the year yesterday, and it’s weak below 196. Gold shares are oversold, however, and the downside looks limited.”

In a long, thoughtful discussion posted at Commodities-Now, gold-fund manager Frank Holmes notes: “Senior gold miners have seen the strongest gains, with average per-share earnings increasing roughly 67% since 2009. … The average senior gold miner now has more than twice the amount of cash flow; mid-sized intermediate gold companies’ cash flow has more than tripled. … One can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years. The extreme was in 2008 during the depths of the financial crisis; many share values quadrupled off of those levels.”


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