So here we are two months into 2008 and gold has romped from $860/oz to $947.89/oz, for a gain of 10.21%, a fabulous start to year. The Gold Bugs Index, the HUI, however has gained 6.81% in the same period of time, so where is the leverage?
Since 2001 gold has increased in price by 250%, at the same time the HUI increased in price by almost 1000%, a ratio of 4:1. And that is why investors put some of their cash into gold stocks, to get the leverage to the gold price. But so far this year the HUI has chosen to ignore this statistical relationship.
Two months is a short time to base a synopsis but the year of 2007 tells a similar story; the HUI moving up in a 1:1 ratio with gold. So we now have a 14 month period of the HUI returning nothing in the way of leverage to gold.
So what does this tell us? Well it suggests that for the ratio to be restored either gold will drop considerably or the stocks will catapult like never before. We have been watching for signs that gold will retrace some of its steps and give up some of its gains, however, oil is up, the mint is printing currencies at record rates, inflation flexes its muscles, world stability sadly only appears to worsen, etc. The stage is set for gold to go a lot further. However she has been known to disappoint just when it looked impossible to do so. For now though,lets assume that gold pushes onwards to the magical $1000/oz. And lets also assume that the HUI decides to play ball and heads back to a relationship of say 3:1 with gold. Wow! Our gold stocks would go through the roof.
We have warned about the possible pull back as they are usually fast and severe and if you are a regular reader of our site then you will be aware of our concerns.
A short time ago we took some profits off the table by reducing our exposure to some of our stocks, a strategy that will not suit everyone but it suited us to do so, having been buyers throughout the summer when stocks were much cheaper. We now have some 'opportunity cash' on the sidelines, even though the lions share of our cash remains invested in gold, silver and uranium stocks. The question remains as where to invest our 'opportunity cash' and of course timing is critical to any successful investment. We are constantly analysing the situation and researching various stocks in order to make a successful trade as and when the opportunity presents itself. As the process of distillation continues a trade will become apparent and if we buy then you will be the first know as we post at the same time we make a purchase.
Stay tuned and stay awake as these are the most exciting times for precious metals that we have witnessed for twenty eight years.
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