Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

AMEX GOLD BUGS INDEX (HUI): Another Golden Opportunity to Buy Gold Shares?

Commodities / Gold & Silver Stocks Jul 11, 2008 - 03:32 AM GMT

By: Peter_Zihlmann

Commodities

Best Financial Markets Analysis ArticleTwo major gold indices dominate the market - the Philadelphia Stock Exchange's XAU and the AMEX's Gold BUGS Index (HUI).

The major difference between the two is that the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. This makes the BUGS Index much more profitable than the XAU when gold prices are rising, but can also compound its losses when gold declines. BUGS is an acronym for B asket of U nhedged Gold Stocks. The index was introduced on March 15, 1996 with a starting value of 200.


Positives

When gold prices are on the rise, the Gold BUGS Index provides an excellent way for investors to capitalize on that increase. The index has a high correlation to the spot price (current price) of gold.

Drawbacks

When the price of gold declines, the Gold BUGS Index tends to fall much faster than its hedged cousin, the XAU. In addition, the firm's unusual index weighting system can be difficult to understand.

Composition

The AMEX Gold BUGS Index is comprised of 15 of the nation's largest “unhedged” gold mining stocks . It is a “modified equal-dollar weighted” index. As a result, most of the index's component stocks are equally weighted, yet the largest stocks still carry a greater weight than the smallest.

The table below lists the components of the Gold BUGS Index along with the weighting that each stock carries in the index (data as of August 2004):

After the introduction of the HUI in 1996, gold outperformed the major gold shares until 2001 as those companies were increasingly unable to generate profits. In 2001 the bull market in precious metals started and the gold shares recovered in a spectacular way as they managed to generate profits again due to the higher metal prices.

Since 2006, gold has outperformed gold shares again in spite of the fact that these companies generate spectacular earnings increases. Newmont Mining's earnings per share for example are expected to increase 80% in 2008 and 25% in 2009.

Major gold shares are definitely undervalued in relation to the gold price at present.

The Case of the Junior Mining Companies

The underperformance of the gold shares and especially the juniors does not make sense from a fundamental point of view. The precious metals remain in a solid bull market and should produce impressive earnings for companies which are in production.

Looking at the chart pattern above in the red circle, one can easily draw the conclusion that a trend reversal is already in progress.

The Long-Term Picture

Price surges and consolidation are a normal pattern of a rising trend as shown above. All our recommendations indicated have resulted in handsome profits even though some patience was needed at times.

The Underperformance of Gold/Silver Shares in Relation to Gold

 

Most components of the GOLD BUGS INDEX show an estimated strong earnings growth in 2008, mostly close to 100% or exceeding this number by most analysts who cover these companies.

More earnings growth is estimated for 2009, depending of course of the level of precious metal prices and also to what extent production costs will rise.

While the major gold stocks fared fairly well compared to the juniors – which may start producing gold in 2008 or 2009 or later – even though they have lagged the performance of the metals in the recent past – will likely strongly rebound later in the year and offer thus the biggest gains.

THE TIMELESS PRECIOUS METAL FUND AND THE SIERRA MADRE GOLD & SILVER VENTURE FUND are excellent possibilities to participate in the coming rally.

For those however who prefer to have their individually managed precious metals portfolios we also offer Portfolio Management services ( www.pzim.com ).

 

By Peter Zihlmann

www.pzim.com
invest@pzim
phone +41 44 268 51 10
mobile +41 79 379 51 57

Disclaimer: P. ZIHLMANN INVESTMENT MANAGEMENT AG does not accept any liability for any loss or damage whatsoever, that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in the trading recommendations or in any accompanying chart analyses, whether communicated by word, or message, typed or spoken by any of its employees.

Peter Zihlmann Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in