Gold/HUI Divorce ? part II
NOTE : This article is an
update on 'Gold/HUI
Divorce ?' of April 29. This article not only discusses
the Gold/HUI ratio again but applies some 'relative' analysis
on the HUI, Gold and Dollar as well . As expected it only
confirmed what the Gold/HUI ratio already predicted : HUI
bottom must be very near. END.
Emotions are running high these days when it comes to future
prospects of the once almighty HUI. After a stunning 3-year
run which launched the HUI by more than 600% the HUI seems
to be getting old and tired and running out of steam. More
and more investors gave up the idea of recovery and said good
bye to Mr. HUI
Now what to expect from the HUI from here ? Is the bull market
in gold stocks over ? Are we heading for HUI 100 as some analysys
do suggest ? Or can we expect a new bull run towards new highs
? Well, difficult questions which deserves serious attention.
This article will focus on :
short term, ready for bounce ?
long term, bull market over ?
HUI short term, ready for a bounce
In my article 'GOLD/HUI
Divorce ?' of April 29 I explained that bottoms in gold
stocks are often characterized by an extreme undervaluation
of the gold stocks compared to gold. These undervaluations
are clearly visible in the Gold/HUI ratio chart. Now the Gold/HUI
ratio is again at such extremes that something simply has
to give since such extremes won't persist for a long period
of time and yes, most of the time they've proven to be (gold/hui
ratio extremes) a reliable indicator for approaching bottoms
in gold stocks. (see chart below)
As this chart shows the Gold/HUI ratio moved
far ahead of its own 200 dma (blue line). When an item moves
too far ahead from its own 200 dma and gets overextended gravity
will pull it back (see next HUI chart) . The current reading
of the Gold/HUI 200 dma is 2.05 therefore it's likely that
the Gold/HUI ratio will meet its 200 dma again at much lower
levels than its recent reading of 2.53.
Gold stocks are extremely undervalued compared to gold. This
becomes visible by an extreme high RSI reading in the Gold/HUI
ratio and a tremendous over-stretch of its own 200 dma. Therefore
the Gold/HUI ratio will meet its 200 dma again most probably
at much lower levels than its recent reading of 2.53. Lower
Gold/HUI rating translates itself into higher HUI levels most
of the time (unless the price of Gold drops rapidly)
In my article 'Gold/HUI
Divorce ?' I presented a HUI-chart which showed that severe
oversold condition (over-stretch of its own 200 dma to the
downside) were mostly solved by a return to its long term
average (200 dma), see again chart below :
This chart clearly shows that severe oversold
conditions are often solved by a return to the long term average
(200 dma) indeed, no matter what the current trend is (bull
Why do I come up with these examples ? Well, because there's
a lot of discussion right now re the HUI's future outlook.
Many analysts suggest that the bull market in gold stocks
may be over and that we're in a bear-trend these days which
could last for a long period of time.
Now even if that were the case, still a severe oversold condition
has to be worked off. As the chart above clearly shows, even
in a bear-trend a severe oversold condition often leads to
powerful short term up-moves.
Now let's take a look at today's HUI chart, is it really that
oversold ? Do we see a severe over-stretch (to the down-side)
of its own 200 dma?
Just take peek at the chart below and judge yourself :
This chart clearly shows an oversold HUI by
all means. Low RSI readings, low MACD readings and a tremendous
over-stretch of its own 200 dma to the downside.
We already saw that any item which moves too far ahead of
its own 200 dma will be pulled back sooner or later. In other
words a strong anomaly (downwards) from the 200 dma could
be considered as a (short-term) buy-opportunity. Again no
matter if the current trend is bull or bear.
The 200 dma deviations (actual reading vs its own 200 dma)
never exceed a certain limit. I mean we'll never witness a
HUI trading at 5 times its 200 dma . During the HUI bull market
over the last 4 years, the HUI only exceeded its 200 dma by
40% (times 1.4) twice. On the downside the HUI only dropped
below its 200 dma by 10% (times 0.9) twice.
So by charting the HUI against its own 200 dma and marking
the 40% and -10% areas as being selling/buying zones you should
get a good indication of its current condition (overbought/oversold).
It's a simple concept which picks the extreme over/under valuations
quite easily. This concept has been given birth by gold-writer
Adam Hamilton. He dubbed this whole concept into 'relativity'
and wrote some brilliant pieces in which he practiced this
simple but powerful concept (eg The
Relative Dollar and Gold).
Now back to the HUI charts. When we chart the Relative HUI
(rHUI) on top of the HUI chart itself in a combo-chart you'll
notice that the extreme HUI undervaluations of the last three
years were perfectly nailed by the Relative HUI chart thereby
providing solid 'BUY' signals. See chart below :
This 'relative' HUI/HUI combo-chart suggests
a 'relative' HUI (rHUI) falling below 0.9 provides a good
'BUY' opportunity ! Therefore its current reading of 0.79
makes a much further decline of the HUI highly unlikely.
Short term : HUI is so oversold and undervalued against gold
that a further decline seems highly unlikely. The Gold/HUI
ratio and the 'relative' HUI both suggest an upward bounce
(at least for the short term) no matter what the current overall
trend is (bull or bear). According to its own history such
a bounce could launch the HUI towards its own 200 dma. Therefore
a (short term) bounce towards the 200 level shouldn't be categorized
as being 'science-fiction'.
HUI long term, bull market over ?
Many analysts do suggest that even if the HUI manages to make
an upward bounce (in order to work off a severe oversold condition)
its gain will be limited by its 200 dma before continuing
its downward trend since Dec 2003. Now, is the HUI bull run
history indeed? Or should we prepare ourselves for the next
move up ?
Well, it all depends on the price of Gold imo. Higher gold
prices mean higher gold stock valuations, it's as simple as
that ! Before we go further let's check out if that is and
has been the case of late.
Higher Gold prices mean Higher Gold
Stock valuations ?
Some analysts claim that gold stocks could be in a bear market
while gold itself could remain in a bull market. Analysts
projections of a HUI decline towards 100 while bullish on
gold confirm the extreme bearish sentiment towards the gold
shares these days.
Statements that gold stock valuations have nothing to do with
the price of gold is denying that the rise of Durban Deep
from 50 cents towards $50 in the late seventies had anything
to do with the sharp rise in the price of gold. Mining companies
do have gold reserves. When gold prices rise, the net value
of the company's gold reserves rise and so will company's
total net worth !
It's easy to check out if there's a strong correlation between
gold and gold shares indeed. Just chart the gold price vs
the HUI and judge yourself :
This chart proves beyond any doubt that gold
shares do have a strong correlation with gold prices. Also
clearly visible is the tremendous Gold/HUI spread these days.
This is a huge anomaly which has to be solved by sharp rising
gold stocks or a rapid decline of the gold price.
So if the gold price is so important for the HUI's future
direction we should focus on gold's prospects now. Gold has
showed weakness since early this year and many people wonder
if we should say good bye to our beloved gold bull. In order
to answer that question I would consider myself first :
'What is the future trend of the dollar ?' Why ?
Because there is a very strong correlation between
the dollar and gold. If the dollar goes so will gold but in
Still some analysts try to put gold in a commodity box and
are happy to explain rising gold prices mainly to producer
de-hedging activities. I don't agree with that kind of reasoning.
When you consider that the paper-gold market is about 35 times
larger than the physical gold market it should be obvious
that a tiny 300 tonnes producer de-hedging don't have that
much effect in the face of a massive 120.000+ tonnes of paper-gold
traded every year. Sure, producer de-hedging helps to underpin
the price of gold but it's not determining its primary trend.
Producer de-hedging is a consequence of a higher gold-price
(expectation) but it's not causing it.
So what determines the primary trend of gold ?
Well, the primary key-driver for gold remains the dollar,
no matter how you slice it.
Gold is the primary driver for gold since gold trades as a
currency and has proven to be a perfect hedge against a declining
dollar, it's there for everyone to see. If gold and the dollar
move in opposite direction than we should see a similar pattern
if we chart gold against an inverted dollar . Is that the
case indeed ? My guess is yes, see chart below and judge yourself
This chart clearly shows that Gold trades like a currency.
Gold is the anti-dollar !
Needless to say that a further dollar decline will launch
the gold price.
Convinced about the gold/dollar relationship ?
Now let's focus now on the dollar itself. The dollar is in
a bear market for more than three years now, see chart below
This chart clearly shows the bear trend of the dollar over
the last three years.
Now, any item which remains in a bear trend provides excellent
sell- opportunities when that items approaches or penetrates
its own 200 dma. Again any item which moves too far ahead
of its 200 dma will be pulled back sooner or later (also called
Also this dollar chart confirms this thesis. We've seen a
couple of counter-trend rallies so far and all provided us
with some excellent 'SELL' opportunities at or near its 200dma.
We've had a perfect sell opportunity in August 2003 when the
dollar index penetrated its own 200 dma (this marked the end
of countertrend rally I) and hit 99.49, we've had a perfect
sell opportunity in May 2004 when the dollar index penetrated
its own 200 dma (this marked the end of 'counter-trend' rally
II) and hit 92.29 and it seems that we're heading for a nice
selling opportunity again since the dollar index penetrated
its own 200 dma again at 84.75. Does it mark the end of 'counter-trend'
rally III ? (see chart above). Hard to say but the fact that
the RSI indicator marks an overbought condition as well makes
the case for a further dollar up-move increasingly difficult.
Now when we apply the 'relative' concept on
the dollar chart again just as we did on the HUI chart we
should get a good indication of its current condition (overbought/oversold).
Again I've charted the 'relative' dollar (rDollar) on top
of the dollar itself in a combo-chart, see below :
This combo-chart of the rDollar and Dollar itself suggests
that a rDollar exceeding the 1.00 level provides a good 'SELL'
opportunity ! It did so anyhow for the last three years. Therefore
current reading of 1.02 makes a much further rise of the Dollar
Of course relative analyses can fail. When could it fail ?
It could fail at the turn of a bear market into a bull market.
But as long as the dollar remains in a bear-market the relative
dollar chart continues to provide pretty good 'SELL' indicators.
Again it did so for the last three years.
It goes far beyond the scope of this article to discuss the
dollar fundamentals but readers interested could read chapter
II of the Gold Drivers Report 'GOLD
& US$' which makes a strong case for a continued bear
market in the US$.
Now last but not least let's have a look at the relative chart
of gold itself. Again I've charted 'relative' gold on top
of gold itself in a combo-chart, see below :
This combo-chart of rGold and Gold itself suggest that a rGold
falling below the 1.00 level provides a good 'BUY' opportunity
! It did so anyhow for the last three years. Therefore current
reading of 0.98 makes a much further decline less likely.
Future scenario ?
Again, no-one can predict the future but nevertheless it's
fun to speculate about future possibilities. Now if the dollar
remains in a bear-market in which I think it will, than we're
approaching now the end of 'counter-trend' rally III (see
three-year dollar chart). What you'll notice is that the end
of a 'counter-trend' rally usually marks the beginning of
a multi-month decline (> 6 month). No here it gets interesting
since the greatest rises in gold happened to start at the
end of previous dollar 'counter-trend' rallies.
The end of 'counter-trend' rally I occurred in Aug 2003. Gold
started an impressive rally then which took it $70 higher
The end of 'counter-trend' rally II occurred in May 2004.
Gold started an impressive rally again which took it almost
$90 higher ($371-$456)
The end of counter trend rally III in May/June 2005 ???. Another
Gold move in the make of $70 - $90 ??
Previous up-moves in gold which started from ending dollar
'counter-trend' rallies lasted 5 - 7 months launching gold
by $70 - $90. Another 5 -7 months up-move in gold taking it
up by $70-$90 brings us $500 gold before year end or shortly
Weird idea ? Don't think so. Even GFMS which is always very
conservative with its price predictions wouldn't be surprised
to see $500 later
Dollar could push gold to $500 level
By Kevin Morrison
Published: April 28 2005
Gold prices could reach $500 a troy ounce this year if the
dollar continues to be forced down by concerns about the twin
US deficits, said GFMS, the precious metals consultancy, on
"We are reasonably sure that we will see a $470 or
$480 gold price, and I think there is a distinct possibility
that we could see $500 this year," said Philip Klapwijk,
executive chairman of GFMS, at the launch of the group's 2005
gold survey. END
It should be obvious that if the dollar remains in a bear-trend
indeed gold will resume its upward trend soon. If Gold resumes
its uptrend soon then the Gold/HUI extremes can't be solved
without much higher gold stock prices.
||Dollar reaches overbought condition
which makes a further up-move increasingly difficult.
Relative dollar chart suggest a top nearby for the dollar
When Dollar resumes its bear trend of last three years
gold will go but in opposite direction since gold is the
anti-dollar and trades like a currency.
Dollar could be very well in its latest stage of a 'counter-trend'
Previous ends of dollar 'counter-trend' rally marked the
start of giant gold up-moves ($70-$90)
If Gold resumes its uptrend soon then Gold/HUI extremes
can't be solved without much higher gold stock prices.
Relative Gold/HUI charts suggest a bottom nearby for gold-stocks
The Gold Drivers Report
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Web-site : www.golddrivers.com
May 20, 2005
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