The fact that the gold mining companies are underperforming when compared to the price of the metal may present a buying opportunity.
The HUI is trading where it was in early November 2010. Since then however the price of gold has risen by more than 13%. The HUI, otherwise known as the AMEX Gold Bugs Index, tracks a basket of unhedged gold stocks and includes big cap names such as Barrick Gold [ABX], Newmont Mining [NEM] and Agnico Eagle Mines [AEM].
The chart below shows a one year chart of the gold price with the HUI (blue line) overlaid on top. It can be seen that until April of this year the miners were acting as would be expected, i.e. they were moving with gold albeit in a magnified fashion. Since April however they have underperformed the bullion and despite moving with gold’s recent rally, they remain undervalued versus the metal.
On previous occasions when the stocks have underperformed the metal in this way – such as in February 2010 and May 2005 – the stocks made spectacular catch up rallies. In the 12 months following the 2005 selloff for example, the HUI rose 137%.