Thursday, August 16, 2007

The Problem for Canadian Gold Stock Investors

16 August 2007

The following chart very simply sums up the problem that Canadian gold stock investors are facing.

On the face of it, the S&P/TSX Global Gold Index (Canada's bellwether SPTGD gold stock index, an index of the 20 largest gold mining companies trading on Canada's Toronto Stock Exchange) has dipped to levels almost as low as its May 2002 values, which were reached only 15 months following the launch of this millenium's dynamic gold bull market in February 2001. That is, based on current levels, there has been no appreciable movement in the Canadian gold stock index in over 5 years.

What is the problem?

The short version is that the Canadian gold stock index has dramatically lagged its US counterpart, the "HUI" Gold Bugs Index, which has seen over 200% appreciation since May 2002, even in the aftermath of its recent dramatic pullback.

What is amiss?

Well, the HUI index is a dynamic index, made up of unhedged gold stocks, and these have outperformed those gold mining companies who persisted with hedging policies (cheap forward sales of gold) originating in the 1980 to 2001 gold bear market.

But there is more to it than that. The Canadian dollar has appreciated over 50% during the past 5 years, making Canadian stocks valued in both currencies decline by over 33% in relative face value.

What happens when you combine these two factors?

The short version is that the Canadian Gold Miner's Index (SPTGD) has collapsed 2/3 against the Gold Bugs (HUI) Index

The chart below says it all.

Let Canadians take comfort in the appreciation of the international value of their currency. But it has aided us little at home, and our SPTGD index has underperformed the HUI by any standard.

The Canadian gold mining investor's problems are summarized very simply in the following chart, which divides the value of the SPTGD index over time by the value of the HUI index over time.

Caveat Canada:


  1. I guess when the dollar quits going up then the stocks should begin to catch up?

  2. There are several indicators that the Canadian dollar has had its run for now. This chart is one of the most dramatic of them. While the USD is weak, it has already fallen about 30-35% from its highs of only a few years ago. Also, the Swiss Franc has greatly lagged the Canadian dollar. If I were a currency trader right now, I would sell Canadian dollars to buy Swiss Francs. (The Swiss Franc is one of the low-interest carry-trade currencies, and with carry trades unwinding, the Swiss Franc will follow the Japanese Yen upwards, in my opinion. However, I am not a currency trader, so I won't be doing this personally.