As per the Gold Bugs Index (HUI), gold stocks have increased in value by around 50% over the last 12 months.
In percentage terms, the precious metal stocks have been moving at a ratio of 2:1 when compared to the price of gold.
The global economy has enjoyed an economic expansion lasting 11 years and is long overdue a correction, which I believe has started.
Investors should consider owning both - gold as an insurance against the next Black Swan Event and the miners for those who are seeking leverage against the price of gold.
As per the Gold Bugs Index (HUI), gold stocks have increased in value by around 50% over the last 12 months, as the underlying commodity - gold - has rallied to higher levels. In October 2019, we wrote that the gold miners were set up for a huge gains after being “unloved and derided as an investment for six long years.” At that time, HUI stood at the 200 level, and today, this index stands at 300.
Gold was trading at $1475/Oz, and of late, has been trading at $1800/Oz, registering an increase of 22% over the same 12-month period.
We can see that in percentage terms, the precious metal stocks have been moving at a ratio of 2:1 when compared to the price of gold, and that is one of the reasons why this sector is attractive to investors. It stands to reason that if a producer is making a profit when gold is priced at $1200/Oz, then those profits really start to sparkle when gold trades at $1800/Oz. With that in mind, do watch out for the July/August earnings season, which should highlight quality mining companies whose turnover and profit will be stunning.
The Gold Bugs Index: The HUI
The following chart shows the progress that the producers have made YTD, and that despite the coronavirus, they were able to overcome that impact and regain those losses and resume their trek north.
The gains have been dramatic, and we may now see some profit-taking by those who trade in and out of these situations. Please be careful if you do move your funds to the sidelines, as this "dip" may not last long as this rally in the precious metals sector gains momentum.
Also worthy of a mention is that when gold made an all-time high of $1920/Oz in 2011, the HUI reached 630. This tells us that as gold is approaching a new all-time high and the stocks are only halfway back to their former levels, we could see a sling shot move by the HUI, which would be very exciting for those involved in this sector of the market.
The 12-Month Gold Chart
The chart below shows the rapid progress that this precious metal has made over the last 12 months, from $1425/Oz to trade today at around $1800/Oz.
In my humble opinion, this reawakening of gold can be attributed to many factors, however, we would like to mention the following for your consideration.
The global economy has enjoyed an economic expansion lasting 11 years and is long overdue a correction, which I believe has started. The US dollar has lost some of its value against a basket of currencies, and as its value falls, the value of gold increases due to their inverse relationship. Central bankers across the globe had taken an accommodative stance regarding fiscal policy long before the coronavirus struck, and have since generated massive amounts of fiscal stimuli to combat its impact.
Gold is a hard asset and represents an alternative to a weakening US dollar. The gold miners represent an alternative to the coming bear market in general stocks. Investors should consider owning both - gold as an insurance against the next Black Swan Event and the miners for those who are seeking leverage against the price of gold.
Gold stocks, as per the unhedged Gold Bugs Index (HUI), have increased in value by around 50% over the last 12 months, and there is more to come.
The precious metal stocks have been moving at a ratio of 2:1 when compared to the price of gold. However, as gold rallies, this ratio could easily increase to 4:1.
As the US dollar and the S&P 500 contract, investors will seek alternatives for their hard-earned funds, and the precious metals sector will be the investment vehicle of choice.
I am long physical gold and silver and own a number of stocks in the precious metals sector, including Wheaton Precious Metals Corp. (WPM), SSR Mining Inc. (SSRM), Sandstorm Gold Ltd. (SAND) and Kirkland Lake Gold Ltd. (KL).
As I own shares in the above-mentioned companies, I am biased towards them, so I would politely ask that you conduct your own due diligence before hitting the acquisition trail.
The precious metals sector is rather fluid at the moment, so your comments would be very much appreciated, and I will do my best to address each and every one of them.
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Take good care.
Disclosure: I am/we are long WPM, KL, SSRM, SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: gold-prices