Why Gold Bullion and Gold Shares Diverge

Q: Why do price and wave pattern often diverge between gold bullion and gold shares?

A: Different market participants trade in the gold bullion verses the shares. They respond differently to market conditions based on different needs, perceptions, and subjective judgements. In gold mining shares, there is no central bank intervention. In the bullion market, central banks are the biggest players.

Q: Why does performance over the past six months differ so markedly between the gold shares indices NUGT and HUI? HUI has been much stronger than NUGT, especially in the last three months. It appears that NUGT has already broken down and will make new lows.

A: Very good question. Bull markets usually form in three upward waves. Different social groups dominate in each wave. In the first wave, you have the economic elite. In the second up wave, the dominant group is the middle class, and in the third and last wave up, it’s the working class. HUI, the Gold Bug Index, is an unleveraged fund of major gold miners. NUGT includes more speculative shares and three-to-one leverage. I expect HUI to first lead in volume and then lag NUGT at the end of the bull market. The elite include people managing the companies and their financiers. When they make extremely negative public statements, this is the time to buy. Remember that 97% of what’s written about economic matters is propaganda deliberately designed to mislead you. If the management of ABX, the world’s largest gold mining company, wants their stock options priced at rock bottom, they might be tempted to approve and pay for a negative company report at a time they consider to be the cycle low.

Q: Do you think they are all corrupt?

A: No, only 97%. For the record, in 2012, the management of ABX “suffered” a significant negative report, published in a major journal, the day before that year’s low for ABX and HUI. It took only 24 hours for the investing public to put in the low.

by Arthur Fixed

[box type=”info” style=”rounded” border=”full”]Commentary from Arthur Fixed the author of the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]