When attempting to put the current market moves into perspective, it makes sense to look at the various market ratios like Price-to-Earnings, Price-to-Book, Price-Sales as guideposts for market direction. Ratios help to put the numbers that are constantly being generated into proper perspective, in relative terms. However, when attempting to look at how relatively valued gold stocks are, there are a couple of ratios that investors should uniformly avoid and those are the [Gold Stock Index]/Gold and the Gold/[Gold Stock Index].
For example, the HUI/Gold ratio currently appears to indicate that we’re approaching the 2008 low. Also, as suggested by well known market analyst John Hussman, since 1974, whenever the Gold/XAU ratio was at 3 or lower gold stocks were a sell. Whenever the Gold/XAU ratio rose to 5 or higher, gold stocks would be a buy (found here).
Currently, the Gold/XAU ratio is at 11.28, gold stock should be considered a screaming buy. However, since July 15, 2008, the Gold/HUI ratio has been above the 5 level ever since. This means that if either the XAU or HUI were bought on July 15, 2008, there would have been losses of -66% by October 27, 2008, an annualized loss of -98%. Additionally, both the XAU and HUI are at –23% and –13% if held since July 15, 2008 to the present (ratio charts below).
Now, because the XAU/Gold ratio matches the levels of the HUI/Gold ratio, the inverse should also be consistent. For this reason, the belief that the current level is close to the end of the decline may be in error. Additionally, as has been suggested by some, the fall in the price of gold and gold stocks may be a precursor to declines in the overall stock market. As we’ve demonstrated many times in the past, when the general stock market declines gold stocks decline by an even larger percentage.
From our work in the topic, our Gold Stock Indicator is 53% above the 2008 low as opposed to the Gold/XAU, Gold/HUI, XAU/Gold and HUI/Gold being within 5% of the 2008 low.
Our view is that, while the 2008 low is not guaranteed, there is the remote possibility that the lows for gold stocks are not completely in based on our Gold Stock Indicator.