Gold Bugs Index (HUI): Buy, Hold or Sell?

Up-date N° 18 / November 30, 2013

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining.

The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.

The HUI Index was developed with a base value of 200.00 as of March 15, 1996. Adjustments are made quarterly after the close of trading on the third Friday of March, June, September & December so that each component stock represents its assigned weight in the index.

The underperformance of gold shares in relation to gold since the beginning of 2004 (and in the 90ties)

The charts of the price of gold and the HUI-Index reveal astonishing facts:

Gold sometimes outperform gold shares, at times however gold shares fare much better? Following some figures:

• GOLD 2000 to 2011 (high): +652%
• GOLD SHARES 2000 to 2011 (high): +1,706%
• GOLD 2000 to 2013: +383%
• GOLD SHARES 2000 to 2013: +545%
• GOLD 2011 (high) to 2013: -37%
• GOLD SHARES 2011 (high) to 2013: -68%
• GOLD 2013 (low) to 2013 (now): +4%
• GOLD SHARES 2013 (low) to 2013 (now): +1%

Should you rather buy gold shares instead of gold?

First, there are a few basic facts that one has to know:

1. Gold stocks are more volatile than gold.
2. It is hard work to select the right companies and to monitor them.
3. You should know the management.
4. You should have a long-term view.

As most do not have the time to devote several hours a day

• to employ a bottom-up selection process and fundamental, proprietary research to identify companies that are considered undervalued, based on growth potential and the assessment of the company's relative value, and
• to seek exposure to overlooked and undervalued gold stocks across the world,

this work is best left to an experienced fund manager. The following chart reveals the risk and rewards of such investment:

Should you own gold rather than gold shares?

On fundamental values, gold and silver shares trade at historic low valuations as in 2008 when you were able to buy companies

• for less than the cash in the bank
• for less than $ 10 per ounce in the ground
• for less than 1,000 times annual gold production
• for a dividend yield of 2.5% or more

Because of this dramatic price decline in these stocks during the past two years, investors have the opportunity to purchase explorers, developers and producers, often referred to as juniors, at about half of the company's net asset value (NAV).

The TIMELESS PRECIOUS METAL FUND and The SIERRA MADRE GOLD & SILVER VENTURE CAPITAL FUND are ideal vehicles to benefit from the coming up-swing of the gold and silver shares in general, but specifically the undervalued junior sector.

Since the low of 2013, some of the gold and silver stocks have started to recovered, telling how the future may look like:

Aurcana: +21%
Endeavour: +33%
First Majestic: +12%
Fortuna Silver: +34%
Paramount Gold: +29%
Silver Wheaton: +18%

From Casey Research:

Today, the XAU/gold ratio is at a historic low of 0.07.

To fully appreciate what this means, look at these former lows for comparison:

• It's lower than the 2008 gold stock selloff;
• It's lower than the "nuclear winter" of the mid-'90s;
• It's lower than the very beginning of the gold bull market in 2001.

Right now, gold stocks are like a rubber band that's being stretched to an extreme. As all rubber bands do, it will snap back. And not just that; based on how extreme the undervaluation has become, they're bound to be among the most profitable investments of this generation.

Conclusion:

Buy Gold and Silver shares now before it is too late!