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Minyan Mailbag: Gold Stocks vs. Gold

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Kevin -

What do you make of the HUI and XAU lousy performance? To me, it seems the shorts are controlling the stocks. Last week Gold was up $11 and the HUI was down $8. On Friday, with gold fractionally up, the HUI was down $5. Watching the trading, it clearly seems the shorts control the stocks.

Minyan Neal

MN-

Jason Roney just posted on this on the Buzz as I was in the middle of writing back to you. And coincidentally, I was just getting ready to write that more and more people are talking about this recent relative underperformance of the XAU vs. spot Gold.

So what is really going on?

The way I approach this question is to run a point and figure ratio chart of the XAU versus spot Gold. So, I ran one going back to 1993. During that time, using a traditional relative strength measure, simply plotting the XAU vs. gold, there have been a number of instances where clear signals were given on the point and figure chart, and each time the signals have trended rather well.

XAU vs. Gold (Chart courtesy Dorsey, Wright)

The outperformance of the XAU versus the spot metal peaked in February 1996. The ratio broke down in April 1997 and did not improve technically again until Sep. 1999 (perhaps due to Y2K related rotation), but the ratio quickly resumed its technical deterioration until March 2001.

From April 1, 1997 to March 6, 2001 the XAU was down 49%, compared to 25% for the metal itself. Meanwhile, from March 6, 2001 to present, the XAU is up 120%, while the metal itself is up (just) 91%.

More importantly, the point and figure ratio chart above shows the XAU on a longer-term basis continuing to clearly outperform the spot metal. As recently as November 22 it added another X to the chart.

The ratio has declined a bit since then but remains positive, nowhere near a reversal down, and a long way away from an actual sell signal. In my opinion, any concern about the XAU relative to spot, at least at this point, is premature.

Position in gold, silver

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