On December 1st gold closed over $500 nominal for the first time in 18 years. It has powered higher to four more consecutive bull-to-date highs since. Then just this week on December 7th the HUI gold-stock index achieved new bull-to-date highs, which also happen to be all-time highs since this index was born in 1996.

Now when a commodity reaches its highest levels in decades and the primary sector index of the stocks that mine it follows suit, one would assume its proponents would be ecstatic and partying in the streets. Not in the paranoia-laced gold world. Most gold-stock investors I have talked with recently are scared and/or frustrated.

Based on these conversations I've been having with folks, I think one primary factor is driving both these fears and frustrations. There is a widespread perception today that gold stocks are woefully underperforming gold.

Once this belief takes root, it generates nagging fears that the cause of this perceived HUI effect must mean something is dreadfully wrong under the surface. It also spawns widespread frustration that gold stocks are not achieving the expected stellar returns. Few things generate as much angst as expectations failing to be met.

As a hardcore precious-metals-stock investor and speculator myself, I have been pondering this quandary a lot in recent months. Is the HUI really lagging gold? Do the elite gold stocks still leverage gold's gains? If not, is there some ominous fundamental disconnect or even sinister opposing force stymieing these trades? These are important questions burning holes in many investors' minds today.

The core of the HUI-lagging-gold theses so prevalent today is rooted in one indisputable technical fact. Exactly two years ago on December 1st, 2003 gold closed over $400 for the first time in this bull market. It was an exceedingly exciting event and euphoria abounded. One day later on December 2nd, 2003 the HUI closed just under 257 at a new bull-to-date high. This high was not exceeded until this week, two years later.

So any HUI investors who purchased gold stocks just as gold powered through $400 had the distinct misfortune of waiting around for two long years agonizing over their negative returns until this week. Meanwhile gold slowly but resolutely climbed 25% higher to close over $500 exactly two years to the day after it surmounted $400. There are few things that irritate investors more than years of negative or flat returns.

While I can understand why investors who bought near the 2003 highs are frustrated, I am not particularly sympathetic. Risk is the lifeblood of the markets and investors have to be willing to fully accept any consequences of their own decisions. Buying when the HUI was stretched more than 55% above its 200dma at a bull high was not a prudent trade. I wrote an essay that very week warning of high odds for a correction.

If you were caught up in the late 2003 euphoria and bought in the latter days of that vertical HUI rally, this may be an emotional issue for you. But for the rest of us who were doing our gold-stock buying many months earlier near the early 2003 lows, it is purely academic. When emotions are driven out of this picture as they should be, there are actually a couple of convincing technical arguments explaining the last couple years of HUI performance.

Our first chart this week highlights these technical arguments that are absolutely crucial for today's gold-stock investors to consider. It also shows the HUI's performance just after major new bull-to-date-high milestones in gold were reached. The vertical axes here are zeroed so the massive HUI gains relative to gold are readily apparent.

Since the HUI peaked near 250 in late 2003 and again in late 2004, it has become the most widely perceived major resistance line for the index. Unfortunately using anomalous highs to define horizontal resistance levels is very problematic and fraught with peril. For example well before euro gold broke €350 in June, countless investors were drawing a false horizontal resistance line at €350 and ignoring euro gold's actual rising resistance. This mistake caused them to miss the massive 36% run from €322 to €439 so far in 2005.

The HUI shattering 250 and leaving it in the dust is even more inevitable than the €350 breakout that seemed so heretical and silly to most before it actually happened. The HUI's second major uptrend channel, labeled above, shows the ascending actual resistance line of this index. This channel is rock solid as multiple support and resistance intercepts across four years define it without ambiguity.

The massive HUI rally that erupted in early 2003 remained in this uptrend channel for two quarters until it attempted to blast above resistance in late Q3, marked by the X on this chart. The HUI soon collapsed back down into its trend channel as it often does when it tries to rip through resistance. If that 2003 rally had been normal, it would have ended near 200 resistance on the HUI and pulled back to support to regroup.

But instead it continued higher. A new wave of bidding on gold stocks rapidly drove the index another 25% higher than resistance, from under 200 to above 250. At the time this was great news for investors. In September 2003 our stocks in our Zeal Intelligence newsletter were already up 49% on average since April 2003 even before this surge from 200 to 250 happened. Investors were thrilled to see the HUI rocket away from resistance.

When prices streak outside of a long-established trend channel, there are only two possible outcomes. Either the price stays out of the old trend and starts carving a new trend or the price collapses back into the old trend. If the latter happens, then its preceding extratrend activity is by definition an anomaly. The euphoric HUI surge and its subsequent collapse in late 2003 and early 2004 proved to be nothing more than an extratrend anomaly.

Thus investors who are comparing December 2003 HUI highs with today's and lamenting are not engaging in a rational comparison. The HUI blasted above resistance two years ago in a mini speculative mania that was not sustainable and soon collapsed back down through resistance to the index's long-time support. Technically the HUI should have topped near 200 in late 2003 at resistance, not 25% above resistance.

If we mentally erase unsustainable extratrend anomalies as technical analysts are supposed to do, then the last two years don't look as bad. The HUI's resistance was 200 in late 2003 where it should have topped, about 245 in late 2004 where it did top, and is north of 300 today where the next major HUI top will probably occur. A conservative technical look at the HUI considers the weight of its trend rather than its outlying spikes.

Interestingly there was a second extratrend anomaly that happened earlier this year. Despite fantastically bullish gold fundamentals, sentiment among HUI investors was rotten driving the index under support in Q2. Why? It was a direct consequence of the 2003 surge to 255. Since the HUI exceeded 255 in 2003 but couldn't break above 245 in 2004, many investors considered the HUI bull market over and they capitulated.

But as is obvious today, the HUI bull is alive and well and forging ahead to new bull highs yet again. Investors who understood that the 2003 surge was an extratrend anomaly never wavered and loaded up on gold-stock positions earlier this year near sub-support lows. But investors who wrongfully chose an anomaly as their progress benchmark made the wrong decisions and have lost a great deal of capital for their folly.

The moral of this story is that unsustainable extratrend anomalies are noise, not benchmarks. They distort a sector's true trend and lead to poor decision making. The HUI has generally been rising within trend over the last couple years and looks great technically in that context. The problem with the HUI lies in 2003, not today! Back then the index got way overbought on euphoria, so consequently consolidated within its uptrend for the next couple years, and has just finally now broken higher.

The second technical explanation for the HUI's behavior in the last couple years lies in the fractal nature of its bull market. As I mentioned a year ago in my original essay in this series, markets are generally fractal. Fractals are similar price patterns that appear at many different scales. Since the HUI's bull to date behavior is rather nicely bound by the three fractals shaded in light red above, they offer some interesting insights.

These three fractals, which are all shaped like the example in the lower right corner of this chart, are a repeating technical meta-pattern. Each fractal contains an initial massive surge upleg, a subsequent correction, and then a secondary weaker upleg that is not as big and is not able to decisively break the initial upleg's highs. You can see this pattern repeating, albeit at increasingly larger scales, in all three fractals rendered above.

First the HUI rockets higher culminating in a euphoric vertical spike to a new bull-to-date high. Since this euphoria is unsustainable, a sharp correction soon occurs to bleed off the excess greed. From these depths a second upleg launches, but it is mediocre and weak compared to its predecessor. But by the time the HUI finishes consolidating out of its fractal pattern after the second upleg's correction it is preparing for its next massive surge to major new bull-to-date highs.

If this cycle continues and we can draw a fourth fractal on this chart in a couple years, this current HUI upleg is going to be utterly massive. It is going to surge well above its current levels and probably even above its resistance. If this current upleg is merely average for this bull, the HUI should at least hit 330 or so before it gives up its ghost and corrects again. The past couple years were the consolidation stage of fractal 3, so if this cycle persists the major surge stage of fractal 4 should be nearly upon us.

If this surge-correct-consolidate technical fractal model is correct, then there is absolutely nothing to worry about regarding the 2003 highs. The HUI surged in 2003, it corrected in 2004, and then it consolidated with a weak rally in 2004 and another correction into 2005. The index was just building a long base from which it will probably launch its next dazzling upleg and rocket away far into new bull high territory.

Thus technically the case can be made in at least a couple of ways that the December 2003 highs are not worth worrying about today. I know I am sure not worried about them and I definitely do not consider the anomalous HUI spike in late 2003 comparable to today's moderate upleg in the lower half of the index's long-term uptrend channel. They are very different beasts, the 2003 one fed by greed but today's fed by gold fundamentals.

But even if all this proves true, it does not answer the vexing questions swirling around today over the HUI's leverage to gold. We need to quantify and analyze this leverage to see how the index is really doing today compared to its historical performance relative to gold.

The next chart carves the HUI's bull into major uplegs and corrections. The HUI's gain in each segment is then compared to gold's gain over the same period of time. Dividing these numbers yields the segmented leverage data. If the leverage is 3 for example, it means the HUI is magnifying gold's gains or losses by 3x.

In individual uplegs, the HUI's leverage to gold has been all over the map, as high as 14.7x in its first major upleg and as low as 2.6x in its anemic 2004 upleg during the fractal consolidation stage discussed above. If we average the leverage attained in the 5 completed uplegs to date, it weighs in at 6.6x. Thus, on average, the HUI's gains have outstripped gold's by 6.6x in this bull. Such results are really phenomenal and do not reflect poor leverage at all.

But since gold had not yet carved its secular bottom during the HUI's first major upleg launched in late 2000, that 14.7x outlier is probably not a good comparison metric. The average HUI leverage to gold in its previous four major uplegs not including that first one is 4.6x. Since the HUI's latest bottom in May, its currently in-progress upleg 6 is only levering gold's gains by 2.5x. Will today's new upleg remain the least levered one in this entire bull market?

I seriously doubt it. First of all, note the leverage pattern above. Upleg 2, the surge leg of fractal 2, had high 7.2x leverage. But upleg 3, the subsequent consolidation upleg of fractal 2, only weighed in at 2.9x. Then upleg 4 above, which happened to be the surge leg of fractal 3, soared to high 5.5x leverage. But upleg 5 only weighed in at 2.6x since it was the consolidation leg of fractal 3. This pattern is high low high low, surge consolidation surge consolidation within the fractal context.

Our current upleg 6 follows on the heels of this high low high low pattern and will probably prove to exhibit high leverage once again on schedule as this surge defines the fourth major HUI fractal. And we have to remember that this current upleg is unfolding just as gold is breaking out to dazzling new bull-to-date highs in almost all major world currencies. Nothing begets interest in investing like rising prices!

With the mainstream financial media all over the world talking about gold, fresh new capital is getting interested and seeking a home in this metal and the companies that wrest it from the bowels of the earth. And I don't think these global investors are swayed by the American pessimism permeating the HUI. Major new gold highs should drive major new capital inflows into gold stocks easily boosting the HUI up into the 4x to 6x leverage range that characterizes its surge uplegs.

Since it is harder to achieve similar percentage gains from high base levels than low base levels, the argument can be advanced that the HUI's overall leverage should trend lower as its bull marches on. This may indeed prove correct, since it takes vastly more capital to drive the HUI up 100% from 75 than up the same 100% from 175.

Nevertheless though, even if overall leverage is gradually moderating we should still see surge uplegs with great leverage superior to consolidation uplegs, the high low pattern should persist even if its amplitude gradually wanes. Whether the overall HUI leverage remains in line with its historical averages or wanes, our current upleg should have much more potential than we have witnessed so far.

The HUI's leverage so far in its current upleg is now the lowest by historical standards, but odds are the HUI will soon soar and ramp up today's upleg 6 leverage dramatically. It is hard to imagine the HUI staying anemic with the glorious advent of $500 gold. This should attract in new gold-stock investors like moths to a flame.

Our final chart illustrates how most of the leverage the HUI achieves in any given upleg is attained in the final weeks, or months at best, of the upleg's existence. The HUI's leverage to gold starts out modestly in all uplegs and then radically ramps parabolically as the upleg matures into the next major interim top.

This chart takes the individual HUI upleg and correction segments rendered above and indexes all of them individually, each one starting at 100 indexed. The resulting chart shows not only how high the HUI has climbed relative to gold in perfectly comparable indexed terms, but it renders each HUI upleg's gains over time. The major uplegs in this bull all witnessed most of their gains in the final blowoff stage of each particular upleg.

The huge HUI uplegs are obviously numbers 1, 2, and 4, the ones in this chart with the massive spike highs. If you look closely though, even these mega uplegs initially climbed with a modest upslope. Up until near 140 indexed, these major uplegs did not exhibit huge leverage. But then rather suddenly around this 140 level, usually after correcting back down a bit near it, the earlier surge uplegs rocketed higher.

Our current upleg headed above 140 indexed at the end of Q3 and then corrected back down under it. Since then it has been moving steeply higher in terms of its slope on this chart. If you carefully compare the lifespans of earlier uplegs up through 140 indexed or so, our current specimen is following this established pattern rather well. Upleg 6 looks like it could indeed ultimately be a big one.

The crucial point to understand here, the one that should help allay fears and frustrations over the HUI's perceived lack of leverage to gold lately, is that the lion's share of HUI leverage to gold occurs in the final weeks, or months at best, of each upleg. If our current upleg is still young there is no reason why it should already be dazzling us by sprinting ahead of gold. Big leverage isn't apparent until the late blowoff stage of each upleg.

Psychologically this makes sense too. Early on in new HUI uplegs just off of major interim lows like in May, sentiment is rotten. Most gold-stock investors are shell shocked from the immediately preceding correction and want nothing to do with the index. So the HUI's initial advance is often relatively slow. But as it gains steam in the following months, more and more investors grow interested in it and drive it higher.

As more and more capital floods in, the gains in the HUI increasingly start to accelerate beyond the underlying gains in gold. Greed becomes the dominant emotion and investors just can't buy in fast enough. The greatest gains in leverage thus occur only in the latter days of each upleg when general euphoria surrounding it runs the highest. Leverage rapidly soars from normal levels to high levels during these late upleg stages.

The way for investors and speculators to capitalize on this phenomenon is to buy low. The best time to purchase gold stocks is not when everyone is excited about them like in late 2003, but when everyone is pessimistic like this past May. We've been executing this strategy at Zeal and have been loading up on elite gold and silver plays for some time now in anticipation of upleg 6. You want to be holding before the blowoff spike up near the end of this upleg where most of its leverage, and gains, occurs.

In our new December Zeal Intelligence newsletter just published, our average gold and silver stock gains on open stock positions were running 31% or so. If this upleg 6 proves to be the surge upleg of fractal 4 and witnesses great leverage, these gains could easily double or triple from here.

We also have over 20 gold and silver stocks listed in our Watch List in the new ZI that we are considering buying if the HUI surge tarries. Please subscribe today so you don't miss any upcoming opportunities and trades!

The bottom line is the HUI's leverage to gold looks just fine despite popular perceptions. Its behavior of the past two years that seems weak compared to an anomaly high in December 2003 actually looks healthy and normal from the sound perspective of the index's primary secular trend and its meta-technicals like the big fractal patterns it has repeatedly carved.

In leverage terms the current HUI upleg looks modest so far, but this is par for the course. The HUI leverage to gold always looks anemic until the final euphoric surge to new interim tops that marks the end of major uplegs. Until this upleg ends and corrects, it is too early to judge what its ultimate leverage may be.