Chart Of The Day - The XAU To Gold Ratio

Includes: ABX, AUY, GG, GLD, NEM, SLV, SLW
by: George Kesarios

One of the worst performing sectors over the past several years has been the commodities space and more specifically, gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) mining stocks.

I have been bearish on gold and silver for a while now, long before the current correction in gold and silver. I have also been bearish on gold stocks even longer. And if I am correct, the commodities boom has been over for some time now and the current correction in gold is simply a confirmation.

But as far as gold stocks are concerned, they have corrected above and beyond the correction of gold. While one would think that gold stocks would trade in tandem with the price of gold; that has not happened.

There are many ways to document the under-performance of the gold and silver mining space. One way is to look at long term charts and measure the run-up or the correction. Another way to measure the under-performance, is in terms of gold.

Two of the most followed commodity stock indices are the Philadelphia Gold/Silver XAU Index and the AMEX Gold Bugs HUI Index.

The difference between the two is that the HUI is a pure gold stock index and the XAU has both gold and silver mining companies.

The chart below shows the ratio of the HUI index to gold. This is really a very oversold ratio. As you can see, the ratio is approaching the lows of 1999.

(Click to enlarge)

But if you really want an eye-opener, the next chart says it all. The ratio of the XAU to gold is at all time lows going back to 1983.

(Click to enlarge)

Charts from here

So the question is, are the stocks that comprise these two indexes -- the HUI and XAU - over-sold enough to warrant buying them?

It is very difficult to answer this question, because as I have said in previous posts (here, here and here), I think gold is going much lower.

However, since the stocks that comprise the two above charts are at all time over-sold relative levels, and they have corrected much more than gold, if you know your gold stocks, "digging" around for opportunities is probably worth your time.

Some of the gold and silver stocks that are in these two indices are: Barrick Gold (NYSE:ABX), Newmont (NYSE:NEM), Goldcorp (NYSE:GG), Silver Wheaton Corp. (NYSE:SLW) and Yamana Gold (NYSE:AUY)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.