Gold Shares Versus Gold Prices Editor: A 5 year chart of the HUI to gold ratio reveals that gold stocks are currently trading at the same level they were in November 2008, a period during which the value of the gold stock index fell by 70%, while gold itself fell 29%. Fast forward to today, and the HUI has fallen 36% since the September 2011 peak, while gold has fallen just 12%. The quality gold producers therefore represent excellent value.

The gold equity sell-off probably represents a nadir in investor sentiment, typical of major bottoms.

Gold equities are trading back near 2007 levels, despite a twofold increase in the price of gold. The underperformance of gold equities vis-à-vis the price of gold can be mostly explained by ETF flows.

Gold stocks have been cannibalized by the surge in ETF volumes, with P/E multiples moving inversely with ETF flows. Part of the reason is that during times of extreme risk aversion and safe haven demand, investors prefer physical gold.

If we are right that 2013H1 will be dominated by easing “tail risk”, then a gold share rerating (vis-à-vis the gold price) is likely. But even if “tail risk” stays elevated in 2013H1, there are reasons to believe the underperformance of gold shares vis-à-vis the bullion price is overdone.

Investor disappointment over the past three years has left gold equities cheap, unloved and under owned. The final catalyst for gold shares may well be intense investor pressure to contain cost overruns and focus on efficiency. Six gold mining CEOs lost their jobs in 2012.

Such shakeups usually herald a major shift in corporate strategy, and gold equities could do well, even if gold prices go nowhere.

The bottom line

Remain tactically long gold shares/short gold and strategically long gold equities.

Article courtesy of

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>