The HUI to Gold Ratio

The HUI to Gold Ratio

David Felder (of the Felder Report) recently commented that investors should avoid FANG stocks (Facebook, Amazon, Netflix, and Google) due to their lofty valuations and should instead focus on a basket of gold mining stocks which he has dubbed “BANG”.  The BANG basket represents Barrick Gold (ABX), Agnico Eagle (AEM), Newmont Mining (NEM), and Goldcorp (GG).  

Felder believes that this sector is significantly mispriced and has explosive upside potential once valuations begin to normalize.  

In his analysis of the major gold producers, he said that the discounts on this group are more significant than they were in the early 2000s, the end of the last major gold bear market.  Felder also added that the companies’ profitability is significantly better than it was at the previous market lows 15 years ago.

As a big fan of the mining sector, I would like to supplement his analysis with a ratio that I have been following for over 20 years:   the HUI-to-Gold ratio.   Basically, the idea is to value gold mining equity values in relation to gold prices.   To start, the HUI Index is the NYSE ARCA Gold Bugs Index.   It 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.

Dividing the HUI Index by the price of gold will yield a fraction that, in the last 20 + years, has ranged from a high of .62 to a low .9.   At the present time, the HUI-to-Gold ratio is .14, very close to the 20 year bottom that occurred in 2015.   Gold mining shares have rarely been this cheap in relation to gold prices, which is one reason I support Felder’s recommendation to ditch FANG and buy BANG.

The information contained in this article is for educational purposes only and does not represent a solicitation to buy any security mentioned.   Always consult your financial professional before making any investment decision. 

Thomas McDevitt, CFA, CFP, EA