Friday, 3 January 2014

Hui mining index relative to gold

A happy and prosperous 2014 to all readers.

Two gold miner bear markets compared

A very long term graph of the HUI gold miners index naturally goes together with a historic view of the gold price. The Yahoo data series for the HUI index starts off in 1996.
This updated article therefore has a two decade window on gold and the miners:
Very long term synoptic view of gold (USD/Oz) on the left scale and the HUI index on the right scale.
Scales differ by a factor 2, reflecting the very close correlation during a second phase of the gold bull market, from autumn 2003 till the spring of 2008.

In addition to the HUI/Gold candlestick graphs shown in previous posting, I include a historic and another long time frame chart of both the HUI index and the HUI/Gold ratio.

HUI (left axis) and HUI/Gold (right axis) over 20 years (Jun 4, 1996 - May 2, 2016) - click to enlarge
We now focus on the latter part, taking on board the collapse of the HUI mining index during the 2008 financial crisis, its recovery from 2009-2011 and the lengthy gold mining bear decline lasting till Jan 19, 2016. We've witnessed the most vigorous recovery for two and a half months ever since. Claims marking this to be the start of a new gold and miner bull market may well be justified.

HUI (left axis) and HUI/Gold (right axis) over more than 8 years (Jan -2008 - May 2, 2016) - 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 recovery

In 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 sliding

However, 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, HUI/Gold went on weakening into 2011, despite the gold rally until August/September 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.

HUI (left axis) and HUI/Gold (right axis): the major slide (Jul -2012 - May 2, 2016) - click to enlarge
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 2012-2013 in previous article: Anatomy of a gold miner bear market.

Highly different Gold Miner Bear Markets

Unlike the financial crisis of 2008, where HUI/Gold made a bottom considerably above the current level, the present decline has been gradual at first, precipitated next and grinding along the bottom at last. It is highly unlikely that a recovery will be vigorous the way it was in 2009. Back then, confidence was high, as gold swiftly regained its safe haven status. Gold miners lead the recovery of an economy shell shocked by the financial crisis.

Now confidence in gold mining is lost completely, 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 are languishing and gold miners continue 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.

Where we are at

The fresh gold miner bull market has brought about at least some relief. The HUI index broke back above 200 by on April, 11 2016. Thereby we're back where the HUI index was at in June 1996. This is where the time series on Yahoo starts off. After 20 year back to square 1; there's however one important difference: back then gold quoted $389. 

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