Follow-up No. 8 / July 11, 2008

AMEX's Gold BUGS Index (HUI)

Overview

Two major gold indices dominate the market - the Philadelphia Stock Exchange's XAU and the AMEX's Gold BUGS Index (HUI).

The major difference between the two is that the BUGS index is made up exclusively of mining stocks that do not hedge their gold positions more than a year-and-a-half into the future. This makes the BUGS Index much more profitable than the XAU when gold prices are rising, but can also compound its losses when gold declines. BUGS is an acronym for Basket of Unhedged Gold Stocks. The index was introduced on March 15, 1996 with a starting value of 200.

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.

Composition

The AMEX Gold BUGS Index is comprised of 15 of the nation's largest "unhedged" gold mining stocks. It is a "modified equal-dollar weighted" index. As a result, most of the index's component stocks are equally weighted, yet the largest stocks still carry a greater weight than the smallest.

The table below lists the components of the Gold BUGS Index along with the weighting that each stock carries in the index (data as of August 2004):

After the introduction of the HUI in 1996, gold outperformed the major gold shares until 2001 as those companies were increasingly unable to generate profits. In 2001 the bull market in precious metals started and the gold shares recovered in a spectacular way as they managed to generate profits again due to the higher metal prices.

Since 2006, gold has outperformed gold shares again in spite of the fact that these companies generate spectacular earnings increases. Newmont Mining’s earnings per share for example are expected to increase 80% in 2008 and 25% in 2009.

Major gold shares are definitely undervalued in relation to the gold price at present.

The Case of the Junior Mining Companies

The underperformance of the gold shares and especially the juniors does not make sense from a fundamental point of view. The precious metals remain in a solid bull market and should produce impressive earnings for companies which are in production.

Looking at the chart pattern above in the red circle, one can easily draw the conclusion that a trend reversal is already in progress.

The Long-Term Picture

Price surges and consolidation are a normal pattern of a rising trend as shown above. All our recommendations indicated have resulted in handsome profits even though some patience was needed at times.

The Underperformance of Gold/Silver Shares in Relation to Gold

Most components of the GOLD BUGS INDEX show an estimated strong earnings growth in 2008, mostly close to 100% or exceeding this number by most analysts who cover these companies.

More earnings growth is estimated for 2009, depending of course of the level of precious metal prices and also to what extent production costs will rise.

While the major gold stocks fared fairly well compared to the juniors - which may start producing gold in 2008 or 2009 or later - even though they have lagged the performance of the metals in the recent past - will likely strongly rebound later in the year and offer thus the biggest gains.

THE TIMELESS PRECIOUS METAL FUND AND THE SIERRA MADRE GOLD & SILVER VENTURE FUND are excellent possibilities to participate in the coming rally.

For those however who prefer to have their individually managed precious metals portfolios we also offer Portfolio Management services (www.pzim.com).

Above recommendations were valid at the time of writing, viz. at

and may no longer be pertinent when you read them.

Disclaimer: P. ZIHLMANN INVESTMENT MANAGEMENT AG does not accept any liability for any loss or damage whatsoever, that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in the trading recommendations or in any accompanying chart analyses, whether communicated by word, or message, typed or spoken by any of its employees.