Miners and Gold bullion
There clearly is a good correlation between miners and gold bullion, which doesn't come as a surprise. However, when the much claimed leverage is concerned, it seems to get a bit tricky. There sometimes is upside leverage with miners outperforming a rising gold price. We've also witnessed miners lagging gold in its ascent. Yet invariably, gold retreating implies an ugly decline for gold miners.
Let's therefore start off with a very long term synoptic view of the HUI index of unhedged gold miners and the price of gold in USD/Oz. The latest update includes data as of March 16, 2017.
Two gold miner bear markets comparedIn addition to the HUI/Gold candlestick graphs shown in a previous posting: "Three year slide for precious metal miners", historic long time frame charts of both the HUI index and the HUI/Gold ratio are included here.
|HUI (left axis) and HUI/Gold (right axis): historic, since June 1996 - click to enlarge|
|HUI (left axis) and HUI/Gold (right axis) over more than 9 years (Jan -2008 - Mar 16, 2017) - click to enlarge|
The left axis for the HUI runs 0-700, while the right axis for HUI/Gold extends 0 - 0.7. They can be optimally compared.
Fall and recoveryIn March 2008, gold broke above $1000/Oz for the first time ever. Raw material prices rallied, with crude peaking at $147. As financial markets weakened prior to the autumn 2008 financial crisis, HUI/Gold slid out of its trading range around 0.50 it had been in for over five years. Initially gold rallied after the Lehman Brothers bankruptcy in September 2008. The safe-haven appeal of gold proved short lived. As the financial crisis went viral, hedge funds were forced to liquidate assets in order to meet margin requirements. Gold proved to be the single asset they easily could get a bid for. The gold price dropped to around $700, down 30% from its March 2008 peak. Gold miners however were butchered as if it were financials loaded with doubtful bonds. HUI/Gold dropped precipitously to a bottom at 0.203 on Oct 28. The recovery of gold has been swift. Even though stocks made a double dip in March 2009, gold now managed to uphold. HUI/Gold rose rapidly with only minor hesitation in 2009. HUI/Gold broke above 0.40 for the first time since the financial crisis on May 26, 2009. In autumn 2009, HUI/Gold peaked twice at 0.43. Gold miners had doubled relative to a rising gold price, ranging around $1050 by that time.
Stalling and slidingHowever, despite gold strengthening over 2010, the HUI/Gold ratio was leveling off. At best gold miners rose in lock step with the yellow metal. After some weaker months, HUI/Gold made a second peak around 0.41 in December 2010, with the HUI index peaking at 577 and gold ranging up to $1400. With hindsight, this proved to be the best time to sell gold mining assets. Investors have been waiting in vain for HUI/Gold to enter into its pre-2008 trading range. Instead, miners kept on lagging gold during its ascent to the August/September 2011 all time high. As a result, HUI/Gold continued weakening into 2011. At the very peak of the gold rally, HUI/Gold was quoting at 0.325, a level $HUI/Gold more or less managed to uphold till March 2012, as gold repeatedly rallied back above $1700.
The gold miner bear market took grip in the spring of 2012 with both HUI and HUI/Gold making their May/July double bottom. You find the full description for 2012-2014 in previous article: Three year slide for precious metal miners.
Highly different Gold Miner Bear MarketsUnlike the financial crisis of 2008, where HUI/Gold made a bottom considerably above the current level, the 2012-15 decline has been gradual at first, precipitated next and grinding along the bottom at last. The 2016 gold and miner recovery was less vigorous than the rally starting in 2009. Back then, confidence was high, as gold swiftly regained its safe haven status. Gold miners led the recovery of an economy shell shocked by the financial crisis.
Later on confidence in gold mining completely vanished, with gold having lost its safe haven status after the repeated bear raids since April 2013. Broad stock markets have been steaming higher, supported both by the zero interest rate policy, improving consumer confidence and a reviving economy. Precious metals however were still languishing and over the long haul gold miners continued to be the absolute dogs of the stock market. Better weather ahead won't bring about any substantial improvement: this time we'll need a climate change. A last graph with more detail, starting off right after the two stage plunge of gold by end June 2013.
|HUI (left axis) and HUI/Gold (right axis): the major slide (Jul -2013 - May 2, 2016) - click to enlarge|
During the 2016 gold recovery, the yellow metal rallied by about $300/Oz or close to 30% from its very bottom near $1050/Oz up to a double peak early July and early August 2016 above $1360. During its ascent, the HUI index broke above 200 on Apr 11, 2016 for the first time since more than one year. Thereby it got back where the HUI index stood in June 1996, when the Yahoo time series starts off: after 20 odd years back to square 1. There's however one important difference: back then gold quoted $389. By Mid March 2017, we are close to that 200 milestone level, after about half of the advance of the 2016 gold rally was lost again.
Where we are at
Further readingReturning even further into the 20th century is possible. The Philadelphia gold and silver miners index (XAU) goes back to December 1983 and Barron's gold miners index beats all, with data going back to before WW-II. For such very long time range articles I refer to: Gold miners: three decades for naught (Jan 2015) or Decades of underperformance (Feb 2011).
It is clear that the HUI/Gold ratio no longer is predictive for the gold miner price trend. Therefore the dependency of the HUI on Gold was analysed more in depth in an article: 'Regression between the HUI miners index and the gold price'. Data since summer 2012 support this quantitative model.