I have written (and warned my readers) several times about the weak performance of the HUI index compared to the price of gold.
Despite general stock markets approaching pre-crisis highs and gold holding up quite well so far, the HUI index has dropped quite substantially. The combination of weak performance of HUI stocks and the relatively “strong” action of gold, caused the HUI index to underperform gold dramatically.Chart courtesy stockcharts.com
I have often compared the underperformance of the HUI index relative to gold to the situation in 2008, right before the “big crash.”
Here it is once again:Chart courtesy stockcharts.com
Now let’s suppose the pattern above takes place. How could we get there?
- A severe market crash, just like in 2008;
- A big drop in gold prices, which would most likely lead to an even bigger decline in Gold stocks or
- A huge rally in gold prices.
How could that be? Well, in the late 1970s, gold rallied substantially, causing everybody to believe that those high gold prices (and therefore mining companies’ margins) were not sustainable. They bought gold bullion while they ignored the mining stocks.