The Secret of the HUI
By Matt Badiali
May 18, 2007

Investors who bought the HUI two years ago have nearly doubled their money.

The HUI (pronounced hoo-ey) is the nickname for the AMEX Gold Bugs Index, a basket of 15 gold stocks and the most widely followed gold stock index on the market.

Although the HUI is widely followed on Wall Street, there's a secret to this index… one that allows investors to make much more money than they would buying a conventional group of gold stocks.

You see, not all the companies in the HUI are created equal. While some of the companies produce only gold, many produce other metals too. In fact, those other metals drove some companies to incredible gains.

Of the 15 companies in the HUI, eight produce other metals. Here's how they compare to the pure gold producers:

Gold Producers 2-Year Returns Mixed Producers 2-Year Returns Iamgold 22% Newmont 15% Golden Star 66% Coeur D'Alene 25% Meridian Gold 72% Gold Fields 77% Randgold Res. 102% Goldcorp 92% Harmony Gold 155% Hecla Mining 110% Kinross Gold 166% Freeport MMR 124% Eldorado Gold 175% Agnico Eagle 206%   Yamana Gold 368%

The pure gold plays on our list returned an average of 108% during the past two years.

Pretty impressive. But the mixed producers brought in an extra 19% return for an average of 127%. That's not really a surprise, since the prices of base metals such as lead, zinc, and nickel have far outperformed gold recently. While gold is up 60% in the past two years, lead is up 165%… zinc is up 231%… nickel is up 206%.

In June 2006, I wrote a special issue for S&A Gold Report subscribers called The S&A Retirement Protection Plan. In it, I covered some of the world's best mining companies, including the world's largest copper company by reserves, Southern Copper (PCU).

But Southern Copper doesn't just produce copper. It also mines zinc, silver, and molybdenum. Riding the bull market in base metals, the company's gross profits rose by 40% in 2006. In addition to receiving a 6.6% annual dividend, our shares are up about 106%. Our total return is around 120%.

Both Southern Copper and the HUI's large mixed metal gains hold the secret to great returns in mining stocks: diversity.

While I love the idea of owning some pure gold plays as a crisis hedge, diversity protects your mining stocks the same way it protects your overall portfolio. So keep an eye out for companies that produce more than one type of metal from their projects.

It's one of the best strategies to ensure great returns as we ride today's bull market in metals.

Good investing,

Matt Badiali