Gold, the HUI and the DOW: Correlations
Monday, April 30, 2007 at 08:50AM
Gold Prices in Gold
Gold, HIU and the DOW Chart
When we plot the performance of Gold against the un-hedged Gold Bugs Index known as the HUI along with the DOW a few interesting facts become apparent.



The chart shown covers the last six years so we are open to the argument that other periods of time will produce a different set of results but for today’s exercise we decided to take a look at recent history in an effort to try and see into the future.

The first thing that we notice on the chart below is that at the beginning of 2002 the three contenders for our investment cash were more or less neck and neck at the starting post. All have performed well over the last five years with the DOW in 3rd place showing a gain of 40.67%, Gold in 2nd place showing a gain of 141.54% and the HUI in 1st place showing a gain of 417.18%.

If we now turn the above performance into ratios what do we have?

DOW to GOLD: 40 to 141 or a ratio of 3.5
GOLD to HIU: 141 to 417 or a ratio of 2.9
DOW to HIU: 40 to 417 or a ratio of 10.4

So we can conclude that the above more or less sums up our recent history.

Lets now take a look into the future and ask a few questions. Firstly where do we see the DOW going in the next 12 months? From what we have gleaned there are not too many analysts predicting a big rise in the DOW in fact some of the poles that we looked at have been fairly evenly balanced as to whether it will rise or fall with the tilt being towards a rise. There are of course Bulls for industrial stocks who will tell us that there are only blue skies ahead for the DOW, but can you see it gaining another 50% to 20,000, No, neither can we, a ridiculous thought. Could it do10% in a year? Yes that’s possible but we will be generous and give it a 20% gain.

So the 40% gain recorded on the above chart increases by 20% to a total of 48%.

We now turn our attention to Gold; can we see gold gaining 50% in the next twelve months? Well we can but we are gold bugs so we will disqualify ourselves, as we are bias towards gold. However there are a number of very highly respected commentators, fund managers and the like who agree with us and can see gold hitting $1000.00 this year. Lets say that we give the same generosity that we gave to the DOW and gold also gains another 20% in the next twelve months taking the 141% gain recorded on the chart to a total of 169%.

We could do the same for the HUI and increase it by 20% from 417% to 500%. But ‘what if’ we were to apply the metric correlating gold and the HUI of 2.9 then we would see the Gold’s increase of 20% multiplied by 2.9, which gives us 58% or 417% plus 58% which gives us 658%. As the HUI is currently standing at 344 then a 58% increase would put the HUI at 543.

This begs the question; Why is anyone holding Industrials? Surely investment is all about performance and performance is all about comparative analysis. We suggest to you that not owning gold mining stocks at this point in the economic cycle is folly so get out there and acquire some gold mining investments before it is too late.
Article originally appeared on Gold Prices (http://www.gold-prices.biz/).
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