EconomicGreenfield

I have made various comments about Gold over the last few months.

One aspect during Gold’s price increase that I have noted as disconcerting is the relative lagging performance of the Gold stocks.  I use the HUI index as a proxy for Gold stocks.

As one can see on the daily chart below, the Gold price is reflected in the top of the chart, followed by the HUI:Gold ratio and then HUI in green:

chart courtesy of StockCharts.com

The HUI index has lagged since approximately the beginning of 2008.  Perhaps the main question is if/when might it start performing better?  One potentially bullish sign is a potential Cup and Handle formation with the two peaks above 500 and current upswing serving as the “lid” and “handle” of the Cup and Handle formation, respectively.

Of course, this Cup and Handle formation is very tentative at this time.  It is simply something to monitor.  However, should this C&H formation “play out” with the HUI strongly advancing above the prior peaks above 500, one could reasonably expect the gold price to react positively if not very much so.  Should it not play out, i.e. the HUI price falters or declines from here, would likely be a bearish omen for Gold.

As I have pointed out in previous posts, Gold’s price can have very important implications from many financial and economic perspectives.  However, due to the complexity of the factors that determine Gold’s price, it can be very difficult to predict its price movements.

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SPX at 1066.43 as this post is written

Gold’s recent price performance has been very strong.

There are, however, quite a few indicators that, from a historical perspective, seem to disconfirm Gold’s current price, which as I write this is $1101 for the December futures contract.

One of the factors that seems to be speaking against Gold is the lagging performance of the HUI Index.  As I wrote in the June 16 blog post:

“One measure that I follow is the ratio of HUI (an index of gold stocks) to that of the physical metal itself.  One theory, perhaps the predominant one, is that the gold stocks should move, or at least verify, the price movements of the physical gold itself.   Looking at the weekly chart (seen below) over the last 10 years seems to indicate that although gold has been relatively buoyant over the last year, the gold stocks, as seen by the HUI Index, have lagged since early 2008.  One interpretation of this is that the gold stocks are not confirming the move in gold, meaning that gold may soon head down…”

Although Gold has continued to head up, as one can see in the chart below, the HUI:Gold ratio continues to lag and is at subdued (relative to the last ten years’) levels:

Chart Courtesy of StockCharts.com

I find the lagging performance of the Gold stocks, as seen by the HUI Index, to be very conspicuous.  This is especially so given the current investment environment where investors have shown they are even willing to aggressively bid up prices for securities that possess the most dubious of fundamental value.  

In my opinion, predicting Gold’s price has always been difficult.  There are a variety of reasons for this, including the fact that the markets for both physical Gold and Gold stocks are relatively small.  It doesn’t take large investment inflows, or outflows, to move the price significantly.

Of course, Gold can be viewed as the ultimate “safe haven” security.  Placing a value on this “safe haven” aspect is very difficult.  Could Gold’s current price be reflecting a significant ”safe haven” premium?  In effect, could the current strong performance of Gold somehow be a precursor of (more) economic problems?  The answer to both of these questions can certainly be “yes.”  However, if so, it would be odd to have Gold rising strongly at the same time low quality paper assets have been rising strongly as well.  From a long-term historical perspective, usually Gold’s “safe haven” qualities are most highly valued when “paper” assets are suffering.  

Gold’s price action should be interesting going forward…

SPX at 1093.69 as this post is written