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« Portfolio Update 10 March 2009 | Main | Where Do You Keep Your Gold? »

Current Trends for Producers of Precious Metals

Chart courtesy of Stockcharts

The above chart is a snap shot of gold, the gold bugs index, the US dollar and the DOW over the last few years. The upper segment compares the progress of gold with the gold bugs index as depicted by the HUI. As we can see, up to and including most of 2007 the gold producing stocks outperformed gold until the sell off in late 2008 when the stocks were sold off as fear gripped the broader markets resulting in panic selling. Since November 2008 gold has recovered and is holding up well. The HUI has also recovered but has yet to regain its former glory in a position outperforming gold. Its true that we now have severe competition in form of Gold Trust Funds for the precious metals investment dollar which raises the question of whether the stocks are the right vehicle from which to profit in this precious metals bull market. (We are including silver when we write about precious metals) The next few months should reveal an awful lot especially if gold heads north we will find out if the stocks have got the legs to follow and outperform gold or not.

The chart also shows that the US Dollar has rallied well and remains strong. This is telling us that some investors still favour the dollar whenever they exit the markets and as yet do not see precious metals as a safe haven or indeed a profitable space to be in. We are surprised that the dollar is still so strong and we expect it to decline throughout 2009. However, for now, it is telling us that we are wrong.

The graph at the bottom of this chart is the $INDU which represents the performance of the industrial stocks. This index peaked in the third quarter of 2007 at the 14000 mark and yesterday it closed at 6626 registering a devastating decline of over 50% for holders of those stocks. Those investors that borrowed to buy on margin have had to sell even their best performers in order to meet the margin calls for them to provide more cash to their investment accounts. This is a vicious circle driving the stocks down to where more and more margin calls kick in and investors are forced to sell driving the stocks down yet again. To make matters worse the banking sector has turned to custard, those well capitalized, well financed, well positioned, enterprises now appear to be anything but well. Their demise is a huge drag on economic activity which itself is shuddering to a halt. All this leads to job loses which generates fear that spreads across the planet faster than ever before resulting in a puddle of inertia. Anyway the point is that the DOW and the FTSE et al, are losing value on a daily basis and it remains to be seen if these declines will act as a drag on the precious metals sector.

Your thoughts and comments on this area are most welcome. We are in March and not too far from the 'sell in May' strategy coming in to play, which is usually in April as everyone wants to get the drop on everyone else, nevertheless it too could be an influencing factor.

Stay tuned for updates.

If you are new to investment in the precious metals sector then you may wish to subscribe of our FREE newsletters regarding gold stocks, silver stocks and uranium stocks, just click on the links.

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Reader Comments (8)

Several issues weigh on my mind:

A correction in the gold price to the strong support at the $850 level has to be a real possibility. I don't even want to think of it breaking down from there!

To what extent will Institutional investors embrace the GLD ETF going forward. Pump n Dump manipulation by the big players?

What will be the consequences of increased shorting, by big investors, of GLD, as well as via the COMEX through proxy by the Fed. Much greater volatility and/or capping of the price?

Influence of continued price distortion of the US dollar due to global reserve currency status and the world's vested interest - at least at present! - in preventing it from devaluing. Continued capping of gold price?

Worst-case scenario of Governments confiscating private gold /nationalizing miners and in-ground reserves as part of the introduction of a new global fiat currency/financial system (listen very carefully between the lines to Gordon Brown's utterances!) - the fact that virtually all governments are currently 'singing from the same fiscal hymn book' in unison, is unprecedented and frankly, very scary!

I hold physical gold, but with increasing trepidation! These are momentous times in human history I suspect.

March 8, 2009 | Unregistered CommenterDavo

On BNN ( canadian network ) they were concerned about the CEOs of gold mining companies selling their gold shares. Their guest related his concern, and questioned why should we buy the hui, when the shares were being sold by the insiders. Any info would be greatly appreciated. David.

March 8, 2009 | Unregistered Commenterdavid richardson

I would expect the dollar to remain strong and even strengthen through the year.
The rest of the world is also a mess and in worse shape than the United States in that they don't have the resources or political cohesiveness to rapidly fix their own problems. What other currency is someone going to put their money in for the time being?
Also, there are no signs CURRENTLY that the United States is monetizing their debt. In order to do so they have to shift their borrowing to long term debt and then start printing money. Most of our debt is short term, so if they start printing now the interest rates would increase.
ALso, during this deleveraging process there has been a lost of wealth of over $10T to date ($1.8T alone in the total US stock market since the so called stimulus package was approved in February). What money they are printing is being sucked down a black hole.
Finally, even though I am bullish longer term on gold, as an individual investor I have great concerns about the manipulation of gold prices by powers far greater than me that are not transparent to the individual investor.

March 8, 2009 | Unregistered CommenterC. Collison

Completely disagree with your article comparing HUI to gold. In fact, your chart seems deliberately misleading. Most would illustrate your argument about the stocks still having leverage against gold with a simple ratio chart. Instead, you use this funky chart showing the two lines separately - one with prices, one with percentages.
If you just run simple easy to interpret chart of the hui-gold ratio it shows that, since the peak in May 2006, the stocks have been on a gentle downhill decline versus the metal which then turned into a waterfall decline late last year. More instructively, after this terrible collapse and the stocks' deeply oversold condition vs the metal, the ratio has only managed a brief unconvincing bounce that did not even get to a short term overbought level on RSI before rolling over again. I think the verdict is in. Until proven otherwise, gold stocks are NOT a good way to play gold unless you are shorting them during declines.
The REAL question, IMHO, is whether this means the metal funds (GLD, SLV etc) are simply drawing away capital from stocks or whether this underperformance by mining stocks is giving early warning that the gold bull has been running out of steam for several years and is the process of topping.
Thank you

March 8, 2009 | Unregistered CommenterCharles

The above comments are all food for thought - thank you!

March 8, 2009 | Unregistered CommenterGold Prices

I love the way you turn a phrase such as: "the banking sector has turned to custard" and the job loss "resulting in a puddle of inertia."
The picture is becoming clear and as it does, folks will begin running away from the dollar (thank you Democrat Congress and Obama).
"Gird your loins" and invest in the well capitalized companies.

March 9, 2009 | Unregistered CommenterD Wetzstein

D, Glad to see that we amuse you.

March 9, 2009 | Unregistered CommenterGold Prices


Please comment on them and in particular: DML Wt Exp 1 Mar 2011 with price @ $30; or, Yamana Gold with expiry of 17 Feb 2010 @ $6. I think both are beyond the pale except perhaps YRI, if a suitor such as Kinross. steps forward. Even DML could start a bidding war soon for Hathor Exp. Can always hope!

Can you recommend other warrants that have more potential?

Thank you for your comments.

March 9, 2009 | Unregistered CommenterR

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