The gold price keeps rising early July 2020 towards the symbolic $1800 mark. After a flawed and weaker period since mid May, miners are again responding favorably to the ongoing gold rally, now anticipating $1800 gold, that level being breached while editing this blog !
The classic graph illustrating relative miner strength is shown regularly on the gold miner pulse page: the NYSE ARCA Gold Bugs index (HUI) relative to Gold:
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| NYSE ARCA Gold Bugs Index (HUI) relative to Gold, Daily observations over 6 months Click to enlarge |
The graph amply shows the swift recovery after the Corona dip mid March. From mid May till after mid June, miners suffered from profit taking, while gold kept range-bound around $1700/Oz. The ongoing uptrend only starts showing up towards end June, as the short declining trend channel is broken to the upside.
Regression between the HUI index and the gold price
The new regression between the HUI and gold since summer 2018, as revealed last september, deserves a closer look following the most recent events among miners.
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| Gold and HUI spread and Regression Trends (2012-17) and since summer 2018 |
Recent prices of miners and gold corroborate and validate the regression relationship. In the original article only gold prices till about $1550 (as in Aug 2018) had been included. Both regression relations show a 'belly' below the trend-line. The Corona-dip has been the obvious temporary digression in the new regression relationship. Previous 2012-2017 regression suffered a similar breakdown during the period leading to and following the orchestrated gold sell-off in April 2013.
Including new data, the linear correlation coefficient again improved to 0.92, while the slope and intercept keep steady. The current trend line now reflects:
HUI = 0.26 . (Gold - $672)
Using the regression parameters, a 'synoptic graph' is constructed with the gold price on the left axis and the HUI index values on the right one:
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| Gold and HUI values since summer 2018 in a 'synoptic view' |
The red graph shows the gold price as read on the left axis, but also the regression value of the HUI when read on the right axis. The blue graph are the real HUI values as read on the right axis. For the parameter interpretation, I'd like to refer to the original article.
The Corona dip is the obvious major disturbance. The gold sell-off to just below $1500 mid March caused a collapse beyond compare among gold miners. In terms of the HUI/gold ratio, gold bear market levels, reminiscent of 2015 were reached. Yet also the weaker period from mid May till after mid June clearly stands out as a few weeks where the HUI true values were below the regression values.
It can be shown more obviously in a graph with 'regression residuals', these are the distances from observed values to the regression line:
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| Distances of true HUI values to the regression line. |
The Corona dip stands out as a few days when the HUI dived to almost 60 points below its 'regression value', which is where it might have been if the sell-off had reflected that of gold. Keeping on the regression line does allow for a larger percentage decline for miners than for gold, since the regression relation naturally includes the expected 'optionality' for miners.
The mid May correction of miners shows up as residuals dropping from positive values over 20 to about -16. While less spectacular, it nevertheless was a clear sign of profit taking after the recovery from the Corona dip.
In the mean time residuals are back into positive territory, albeit at a modest level. Miners have recovered and are looking forward to $1800 gold.
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