THE XAU INDEX VS. THE AMEX GOLD BUGS INDEX -- WHY THEY SHOW DIFFERENT CHART PICTURES
THE GOLD BUGS INDEX FAVORS UNHEDGED STOCKS... Most people look at the PHLX Gold & Silver (XAU) Index to plot the trend of gold stocks. However, there's another lesser-known index called the AMEX Gold Bugs Index ($HUI). Each index includes eleven stocks. Seven of the same stocks are in both indexes. The difference lies in the fact that the Gold Bugs Index only includes gold companies that do not "hedge" their gold production beyond 1.5 years. That's the key. Companies that do little or no hedging benefit more from rising bullion prices than companies that do a lot of hedging. That explains why the Gold Bugs Index has been much stronger than the XAU. Charts 1 and 2 compare the two indexes. [Both charts are plotted on a log scale for better percentage comparisons]. The different chart pictures are striking. Both bottomed at the start of 2001 -- and have risen for two years. While the XAU Index failed to rise above its 1998/1999 highs, the HUI has risen to the highest level since 1997. Over the last two years, the HUI has risen 248% while the XAU has gained only 60%. Chart 3 is a relative strength ratio of the HUI vs. the XAU -- and shows the dramatic outperformance by the Gold Bugs Index since the start of 2001.
Chart 1
Chart 2
Chart 3
BARRICK GOLD AND PLACER DOME BIGGEST XAU LOSERS... Of the four stocks in the XAU that are NOT in the HUI, the two most prominent are Barrick Gold and Placer Dome. Not only are they two of the most heavily-weighted stocks in the XAU, they're also among the worst performers. [Their combined weighting in the XAU is 26%]. Over the past year, for example, Barrick Gold actually lost -12% while Placer Dome fell -18%. By comparison, the XAU rose 8% over the same time period. [Over the entire two-year span, ABX lost -20% and was the biggest drag on the XAU Index, which gained 60%]. Those two stocks alone account for most of the underperformance by the XAU Index. The falling relative strength lines of each of the two stocks shows them underperforming the XAU.
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LEADERS IN GOLD BUGS INDEX... Three of the stocks that are included in the Gold Bugs Index (that aren't in the XAU) that have contributed most to its outperformance are shown below. Glamis Gold has been the most consistent Gold Bugs Index leader -- gaining 120% over the past year and 589% over the past two years. The relative ratio shows steady outperformance over the HUI Index. Hecla Mining gained 164% over the past year and 580% over the past two years -- and is another HUI leader as shown by its rising ratio line. Kinross Gold was the weakest of the three leaders, but still gained 122% this past year -- and 318% over the last two years. [The three gold leaders are, however, showing signs of weakness. Glamis and Kinross Gold have fallen beneath their (blue) 50-day averages -- while Hecla has fallen under its (red) 200-day average].
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BARRICK VS. GLAMIS... The main difference between the XAU and the HUI Indexes seems to boil down to these two stocks. Barrick Gold has been the biggest drag on the XAU -- while Glamis Gold has been the biggest help to the HUI. [Barrick also carries a relatively heavy weighting of 18.7% in the XAU Index -- while Glamis carries a more modest 5.5% weight in the HUI]. Their differing trends seem to depend mainly on whether or not they hedge their gold production. Barrick does and Glamis doesn't.
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Chart 10
CHART LOOK AT GOLD BUGS INDEX... Despite its superior performance over the XAU, the Gold Bugs Index has also entered into a downside intermediate correction. The January rally stopped right at last summer's peak. The HUI broke its 50-day day average a month ago (see blue arrow)-- issuing a short-term sell signal. It's now challenging its 200-day moving average (see red arrow). Needless to say, this puts the HUI at an important chart point. [The XAU has already broken its 200-day line]. Although we remain positive on the longer-term trend of both the HUI and the XAU, there's no convincing evidence yet that the intermediate correction in gold stocks has run its course.
Chart 11
