This week, we will look at an index of major gold mining stocks, HUI, and see that while the index does a nice job of identifying gold peaks and bottoms, mining stocks generally have not provided the positive leverage to the metals that precious metals investors sometimes claim.

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The first combo chart shows HUI on top and gold price on the bottom. The first thing you should note is that HUI has traded within a very well defined channel since its inception nearly 30 years ago. Next note, that HUI is actually about to break out of an important long term yellow resistance line that goes back to 2011. For this reason, mining stock investors do have reason for optimism, but we'll see in a moment that they should not get carried away. An important thing to note about this chart however is that when HUI makes important bottoms (noted by the white vertical lines) and tops within its channel, important tops and bottoms were made for gold as well. There are a number of indicators I'll use to determine when gold finally makes its secular peak that I am expecting over the next decade, and one of them I anticipate seeing is that HUI will have hit its upper channel. Of course, the other major takeaway here is that given HUI has broken out from an important descending resistance line, I expect to see gold rally hard from here just as it did in 2003.

(Click on image to enlarge)

The second chart is the same combo of HUI and gold, but I want to draw your attention to something else. When HUI made an important breakout in 2003 around 140, gold was at about $340. Seventeen years later, when gold had risen all the way to about $1450, HUI had returned to 140. In nearly two decades, gold had increased more than 4X while HUI went absolutely nowhere! Also of note is that HUI is up only about 50% from where it debuted in 1996 while gold is up about 6X over that time. So while gold stocks may provide some positive leverage over shorter periods of time, the long term relative performance is quite dismal.

The analysis is quite clear - buying physical gold will protect your purchasing power over long periods of time; gold mining stocks are just pure speculation.  

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