Can Gold Stocks Regain Their Luster?

Source: World Gold Council

Gold stocks fell to a three-and-a-half year low on Monday, as investors continue to reduce their exposure to bullion and other commodities on weakening economic data from China.

With stocks rising, the dollar strengthening, and U.S. Treasury bond yields holding below 2 percent, investment demand for gold continues to decline. According to BlackRock, gold exchange-traded product outflows have now reached $5.6 billion year-to-date.

Gold futures prices closed down last month for the fifth consecutive time, losing 11 percent and posting their longest losing streak since January 1997.

Meanwhile, the CBOE Gold Index, which is an equal-dollar weighted index composed of 12 companies involved primarily in gold mining and production, is down 25 percent in 2013.

Could gold be poised for a rebound?

The HUI Gold Ratio, which measures the relation between the NYSE ARCA Gold BUGS Index, also known as HUI, and the price of gold, recently hit 0.22 — the lowest level in nearly eleven years. HUI is a modified/equal dollar weighted index of companies involved in gold mining, while the acronym 'BUGS' stands for Basket of Unhedged Gold Stocks.

The last time the ratio was at this level, the CBOE Gold Index rebounded more than 40 percent in the three months that followed.