HUI Index; Basket of Unhedged Gold Stocks – BUGS

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http://www.amex.com/?href=/othProd/p...

The Amex Gold BUGS, HUI Index is a modified equal dollar weighted index of companies involved in gold mining. The Gold BUGS Index is listed on the American Stock Exchange under the symbol "HUI".

The HUI Index and Philadelphia Gold and Silver Index (PHLX: XAU) are the two most watched gold indices on the market. The Gold BUGS Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.

The HUI Index was developed was a base value of 200.00 as of March 15, 1996. The AMEX Gold BUGS Index currently consists of 15 of the largest and most widely held public gold production companies

Adjustments are made quarterly after the close of trading on the third Friday of March, June, September & December so that each component stock represents its assigned weight in the index.

HUI/Gold Ratio

The HUI/Gold Ratio is an expression which compares the relative quantities of the Amex Gold BUGS Index and the price of gold.

The ratio is calculated by dividing the value of the Amex Gold BUGS Index by the price of gold.

Investors use the HUI/Gold Ratio to illustrate the ever-shifting relative strength of the gold stocks versus gold

Positives:

When gold prices are on the rise, the Gold BUGS Index provides an excellent way for investors to capitalize on that increase. The index has a high correlation to the spot price (current price) of gold.

Drawbacks:

When the price of gold declines, the Gold BUGS Index tends to fall much faster than its hedged cousin, the XAU. In addition, the firm's unusual index weighting system can be difficult to understand.

TAYLOR HARD MONEY ADVISORS, INC December 17, 2008

Dialog – Jay Taylor & Dr. Robert McHugh

TAYLOR: So, let me get back to gold just briefly then, in terms of your medium and long term view of gold.

MCHUGH: My long term view is that I am bullish, incredibly bullish, because I do think it will eventually have to be used to back new currencies or existing currencies. If we are headed into this Grand Super Cycle depression, they are going to have to recreate the currency, so gold is really critical there. Intermediate term, I am also bullish, looking at both stochastics on a weekly basis, which is my intermediate signal that allows for a nice rally.

The longer term, which would be the monthly full stochastics, allows for a nice rally. All in all, I think gold is going to hold up fairly well in relationship to how other financial market instruments have done. Relatively speaking, gold has held up pretty well and should continue to do so.

Once the short term correcting phase is over, gold should take off, perhaps even in 2009.

TAYLOR: Well, it’s interesting that you say what you did about the fact that gold has held up relatively well compared to most other things. Gold has, of course, risen dramatically compared to oil, compared to copper, compared to the Rogers Raw Material Fund, compared to a whole broad base of things. One of the beliefs that I’ve had is that gold mining shares should do well as they did in the 1930s because the cost of producing gold goes down much more than the price goes down. We are seeing that actually happen now, which leads me to one of my final questions, for you Robert. With respect to gold shares, how do the gold share markets look to you,

TAYLOR: With respect to gold shares, how do the gold share markets look to you, maybe the XAU or one of those indices?

MCHUGH: Well, the HUI is really the one we pay a lot of attention to and it did not do well. It really fell almost hand in hand with the entire general market. In fact, it even fell more, which surprised me a little bit. I thought that although it is below ground gold, I thought the fact that it was tied to gold would help it a little bit

TAYLOR: Actually, I believe that is exactly what happened in the 1929-1930 time frame as well. Homestake and some of the others went down initially with the market and then we had a bounce up in the equity markets before the next plunge down, but gold shares continued to perform well then after that

MCHUGH: And that is what we hope will happen now is that, in the next leg down in the major stock indices, the HUI will not follow its stock component, but will follow its gold component. It did not do that in the first leg down. That’s disappointing, but at some point, they have got to get their hands on gold as demand increases, and it is going to increase for it. They are going to have to mine it because the coins are drying up and….

TAYLOR: And yet the paper price for gold has been declining.

MCHUGH: Yes, and there is some manipulation going on there or what you would call government manipulation or market manipulation from other sources than government. They try to keep the price of gold down because they want people to continue to turn to the fiat currencies like the dollar and the Euro. What happens is, as people lose confidence in those currencies, they are going to look to gold as real money. At some point here, gold’s value increases as these fiat currencies get shakier and shakier and central banks hyper inflate more and more volume of them. The central banks don’t want gold’s value to increase at all. Their whole strategy is to preserve the dollar, preserve the fiat currency system to keep the bankers in power and control.

They need to keep the lid on gold, but at some point, supply and demand forces, fear, and the break up of the financial system will drive people to what has traditionally been, for thousands of years, real money, which is gold and silver.

Hg