HGR (HUI/Gold Ratio)

The HGR is exactly the daily HUI close divided by the daily gold close.  When charted over time, this ratio reveals the relative performance of gold stocks compared to the metal that drives their profits and hence ultimately their stock prices.  The HGR is rendered in these charts in blue.

On average during those 5 pre-panic years ending in mid-2008, the HGR ran 0.511x.  In other words, the HUI tended to trade at just above half the level of the gold price.  A 5-year span is a long time, absolutely secular.  This encompassed nearly all possible sentiment environments, from rampant greed late in major uplegs to crippling fear late in major corrections.  0.511x is the long-term normal baseline HGR.

Since the panic, this average HGR has plunged to 0.350x.  So gold stocks have been nearly a third less valuable relative to gold in this post-panic era than they were in the normal times before it.

This next chart zooms in to the result of this wholesale abandonment of gold stocks, the dark post-panic era.  In addition to the HGR in blue and the HUI itself in red, a third series is shown in yellow.  It is where the HUI would hypothetically be trading if it returned to its pre-panic average of 0.511x the price of gold.  The massive gap between these normal HGR levels and today’s is the huge opportunity in gold stocks.

Between late July and mid-September, the HGR surged from 0.245x to 0.297x.  This is the strongest HGR rally seen since mid-2009 just after the panic.  And the HGR’s last major breakout above a sharply-downward-sloping 200dma was also last witnessed in that same timeframe.  Remember that was early in the post-panic gold-stock recovery that led the HUI to quadruple!

Read more: http://www.zealllc.com/2012/cheapgs4.htm