Even gold mining companies vary differently in their costs of excavating gold from the ground. The average on the HUI miners is believed to be around $325 per oz. If you view HUI as a very long-term call option of gold (expires when miners are either running out of reserves or in bankruptcy), it makes perfect sense why HUI return was over 10 times higher than gold in phase I. When gold reached the bottom of $250, HUI was way out of money and as option it wasn't worth much. HUI during 2000 at $38 behaved like 100 calls ($0.38 per call) with a strike price at $325 when gold traded at $250, $75 out of money.
Then during phase II, gold slowly rose to $325 in the next 1-1/2 years and finally put HUI at the money (at its strike price). What do you think HUI should be traded at then? I think $155 per 100 calls ($1.55 per call) would be a very reasonable market price due to the time and volatility values of a option according to the Black Scholes model. This was exactly what HUI was traded at during that time.
Now for phase II, when gold price has kept creeping up for the next 5 years from 2002 to now. HUI, again as call option of gold, becomes more and more in the money. When HUI has moved from $155 to $320, or 100% return, gold has "magically" matched from $325 to $650, also 100%. This is very similar to the so-called delta hedging of a call option, thus the ratio of change is approaching one for in the money call option. The only minor change I have made here is to use the ratio of percentage changes instead of the ratio of variances of the two, which I have found matching the return between HUI and gold much better.
The behavior of HUI over the past 7 years has proved exactly that HUI is a derivative of gold, at least from a long-term time horizon. This is not a coincidence and makes perfect fundamental sense. Traders know that stock option usually leads stock, so is HUI as a leading indicator to gold. I have also done a regression analysis between HUI and gold - not surprisingly, the adjusted R square is 94%, also approaching one.
If we accept this view, the implications are:
1) We should never view HUI independently - it has to be in conjunction with gold at all times;
2) Any technical analysis on gold alone such as Elliott Wave Projection would only make sense if the same wave count analysis on HUI is correct;
3) The deviation of HUI from gold from time to time is an important TA indication due to its usual leading nature, and it tells us more information than just the gold movement itself. I will discuss more about the deviation in the future.