Thursday, January 21, 2010

A Gold-And-Gold-Mining Chart Worth Pondering

It's embedded in a bullish article at Moneycontrol News Center, entitled "Gold Still On A Feverish Pitch." The chart itself, which comes courtesy of DataStream, is on page 2 of the article. It correlates the FSTE Gold Mines Index with the price of gold itself:

There's obviously a positive correlation, but what I'd like to call attention to is the convexity in the graph. (More specifically, for mathematically-minded readers, the X-axis convexity.) That convexity implies that the FTSE gold index trails gold itself when the prices are high. Also note that the recent reset, shown by the red line, makes for a downwards discontinuity. In other words, the FTSE gold index has been knocked down from its old correlation to a new one that makes it a worse performer with respect to gold itself. Despite the author's attempt to make a straight line out of the more recent data points, convexity still kicks in at prices above $1,050. There may be too few data points to establish convexity definitively, but a daily correlation should show it.

Sad to say, but it looks like gold shares are a better buy when the gold price is low. Gold tends to lead the other commodities, materials, capital goods, etc. that make for a mine's costs, but those costs seem to catch up eventually.

This weekly chart that plots the Amex Gold Bugs Index (HUI) with respect to gold over the last three years, shows its own convexity over the last six months. Given what's above, it makes a doleful kind of sense:

Also sad to say: one of the reasons given for gold to go up long-term in future - declining production because the easy gold's alrady been found - doesn't say much that's good for gold-mining stocks. I should note that both the HUI and the FTSE Index contain major producers.

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