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Point & Go Figure: XAU vs. Gold

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Yesterday on the Buzz & Banter the topic of gold stocks versus the base metal took center stage. More and more people are talking about the recent relative underperformance of the Philadelphia Gold and Silver Index (XAU) and Amex Gold Bugs Index (HUI) vs. spot Gold.

So what is really going on?

One way to approach this question is to run a ratio chart of the XAU versus spot Gold. I ran one going back more than 10 years. 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)


HUI 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 until Sep. 1999 (perhaps due to Y2K related rotation), but the ratio then 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.

A similar relative strength chart plotting the HUI vs. the spot metal shows a potential new buy signal could occur with the addition of one new X on the chart. Since March 6, 2001, the HUI is up a whopping 363%, compared to 120% for the XAU. This shows the leverage the unhedged mining stocks can provide during gold bull markets. The HUI is made up exclusively of mining stocks that do not hedge their gold. Of course, leverege cuts both ways. During the period from April 1, 1997 to March 6, 2001, the HUI was down 66%, compared to 49% for the XAU and 25% for the metal itself.

Because of the leverege in the unhedged mining shares, it makes sense to watch carefully for a potential breakdown in the HUI vs. gold, which should occur before a similar breakdown in the XAU vs. gold ratio.

But for now, the XAU and HUI ratios versus the metal remains positive in both cases, 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, silver stocks

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