Over the past six months the HUI index (also known as the NYSE Arca Gold BUGS index), which tracks the performance of the largest gold companies, has fallen by 42.8%. However, of the 16 unhedged gold companies that comprise the index, several have held up somewhat better. This article looks at which stocks have held up better than the HUI and which ones might begin to do well if and when the price of gold begins to rise.
The value of most mining companies is leveraged to the price of the metal/s they produce, and over the past six months the price of gold has fallen by 19.6%. As a result the HUI index has fallen by 42.8%. However, not every company has fared quite so badly.
The chart below shows the price action of the HUI index over the past six months (red line). It also shows four companies that have fared somewhat better than the index. These companies and their percentage declines are: New Gold (-34.1%), Randgold (-29.9%), Newmont (-29.5%), and Goldcorp (-27.0%).
A 6 month (daily) chart of the HUI + four gold producers (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
If we broaden our search to include some smaller-cap names as well as the royalty companies (such as Franco-Nevada which is down 26.2%), we find others that have also fared considerably better than the main gold stock index.
What’s clear is that the market is placing a higher value on companies in safe geographical regions that have high profit margins, and it is these companies that are likely to outperform if and when gold begins to rise.
In the ten years leading up to September 2011 the price of gold rose by 580%, however the HUI index rose 891% and was the top-performing US sector.
Since September 2011 however, the price of gold has been trending lower and as a result the mining sector has been severely beaten up, particularly in the last few months.
No one knows when the price of gold might begin to recover. However, those that have studied monetary history know that the policies being pursued in the US and other G20 nations, eventually leads to devaluation of paper currencies, and therefore the long-term outlook for the gold sector remains positive.