Home > Gold > HUI / Gold Ratio at Panic Levels

HUI / Gold Ratio at Panic Levels

From the always informative Zeal Speculation and Investment:

As I ponder this vexing puzzle [low gold miner stock prices], my mind keeps returning to how the stock markets in general work. Any stock is ultimately a fractional share of its underlying company’s future profits stream. If those profits are high or rising relative to the stock price, investors bid up the stock to reflect its underlying economic reality. Over the long term, the markets eventually price all stocks to fairly represent their profits.

And despite the many challenges of mining gold, profits are rising dramatically. My business partner Scott Wright recently updated his fascinating research thread proving this. By painstakingly analyzing detailed data from individual major gold miners collectively representing nearly half of global mined production, it is apparent gold-mining profits are amazing. Last year the average gross margin of this elite group ran $915 per ounce, or an astounding 58%! Gold miners are making money hand over fist.

And later…

This week the HGR [HUI / Gold Ratio] slumped to levels only seen two other times in this secular gold bull. The first was way back in early 2002 when the gold-stock bull was just getting underway so participation was light. And the second was briefly during late 2008’s once-in-a-century stock panic. Quite literally, relative to gold the gold stocks are trading at stock-panic price levels today!

Is this rational? Do these dirt-cheap prices fairly reflect the current and future profits streams the gold miners are spinning off? History argues no way. The entire stock-panic event essentially encompassed the second half of 2008, with normal market conditions existing before. Over the 5 years between mid-2003 and mid-2008, the HGR averaged 0.511x! The HUI tended to trade at about half the price of gold.

On mean reversion:

Mean reversions are one of the most powerful forces in the financial markets.  And gold stocks are in the catbird’s seat with two huge ones in their favor.  Not only do gold stocks need to be much higher to reflect today’s prevailing gold prices fundamentally, but this sector’s psychology is due for a radical shift as well.  Thus just like back during the stock panic, today’s panic-priced gold-stock levels aren’t sustainable.

Perhaps Stein’s Law (“If something cannot go on forever, it will stop.”) applies here with regards to gold stocks so badly lagging the price of gold.

I highly recommend you go read the entire article and look at their excellent charts showing the HUI / Gold Ratio.

Disclaimer: The above is for informational purposes only. This should not be considered investment advice. Any investment decisions are your own and should be made after conducting your own independent research and / or in consultation with a professional investment advisor.


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