There are two major gold indices, the Philadelphia Stock Exchange’s XAU and the AMEX’s Gold BUGS Index (HUI). The major difference between the two is that the HUI index is made up exclusively of mining stocks that do not hedge gold more than a year and a half into the future.
BUGS is an acronym for Basket of Unhedged Gold Stocks. The HUI index was introduced on March 15, 1996 with a starting value of 200.
Eric Hommelberg of golddrivers.com has written a report on the ratio between the HUI and gold. He says that the Gold/HUI ratio has proven to be a reliable indicator for picking HUI bottoms.
Eric says that the current gold/HUI ratio points to extreme undervaluation of Gold shares compared to the gold price and that extreme undervaluation such as we have now never persists for a long period of time. He says that undervaluation will morph itself into overvaluation over time.
Eric says that if the gold/HUI ratio predicts a bottom in gold stocks (which he says it is doing now) and the price of gold is in an uptrend, then a powerful rally could emerge in gold stocks. On previous occasions when the gold/HUI ratio has predicted a bottom in gold stocks and the price of gold has been heading north it has led to HUI rallies of at least 50% in only a few months.
Eric says that this gold stock rali is supported by the gold price being in a classic triangle pattern which has to break out soon and if its to the up side of its current triangle pattern, it could lead to a powerful gold price rally with a price projection of $470 - $480.