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.
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