Sep 6, 2004 The HUI Spread - An Update PMtrader 321gold

The HUI Spread - An Update

PMtrader
September 6, 2004

In a prior essay, entitled "The HUI Spread in the Golden Bull," an analysis of the spread - the price of gold per ounce (POG) minus the HUI index value - was given. In particular, it was noted that a 50 day moving average (dma) of the spread identified key buy points for the HUI since the start of the golden bull - roughly November of 2000. The results tended to indicate that the unhedged mining shares did indeed provide a leading indicator for the price of gold, as well as their own future performance.

In the data that follows and by way of reiteration, ^GLDD was used as a proxy for the POG. The data presented below spans the period January of 1999 through market close of September 2, 2004, and thus encapsulates the beginning of the current bull market in gold.

Now consider the annotated plot below. Three primary sets of daily data are given: Gold, the HUI, and the Spread. The 200 dmas from the prior-referenced editorial have been cleared away, and only the 50 dma for the spread has been retained - the dark green line. A linear trend line has been added for the Spread and is colored purple.

click to see large chart

The linear trend line is important, as tracking the 50 dma for the spread compared to this linear trend line - as opposed to a particular constant value such as 200 - seems to give a better highlight to the predictive performance of the Spread. In this regard, notice the red arrows below the 50 dma. These points represent minimums in the 50 dma of the spread below the linear trend line. Notice that they tend to flag sell points for the HUI index. On the other hand, the green arrows, which appear above the linear trend lines represent local maximums in the 50 dma, and correspond to buy points in the HUI index.

One of the more interesting things about the analysis of the spread - and the 50 dma of the spread in particular - is that very few false positives are given. However, using this analysis in a forward looking manner for short term trading can be problematic. For example, consider the blue arrow at right, which points to current HUI spread performance. The questions, which are begged with a short term outlook, are fairly obvious. Is this going to be a local maximum in the 50 dma? And if so, will history strongly rhyme for this 50 dma indicator?

However, with a somewhat longer term perspective different considerations come to mind. First, it is worth noting that buying near previous peaks has been "good enough" - granting at least a several-month forward-looking timeframe. The other consideration is more subtle, and potentially dramatic in its implications.

Notice the small bumps and wiggles in the HUI just after the November 28, 2000 tick mark on the x axis. They are hardly worth noticing, right? Well, I can assure you that those little bumps and wiggles were plenty exciting at the time. Now fast forward to today and consider the large 30 point oscillations in the HUI. The point being, if history rhymes and looking back on the current HUI performance appears as simply a small set of bumps and wiggles, suffice it to say that the HUI is going higher, in fact much higher.

September 3, 2004
PMtrader
Email: PMtrader

Now on a personal note: My novel, Eye of the Pyramid, is available. Thank you to those who have already purchased it. Axiom House has put together a first class hardcover book.

Relevant links are:-

Axiom House: http://www.axiomhouse.com/index.htm
Eye of the Pyramid: http://www.axiomhouse.com/EyeofthePyramid/main.htm
(or click on the cover) -->

Do not pass go - do not collect $200. Go to the website and check it out. Axiom House is offering preorder incentives, which include a signed first copy and a discount. The first scheduled ship date is October 7, 2004.

If you buy it, you have my personal guarantee that you will be glad you did - if you aren't, I owe you a drink at the v500 party. If you can afford it, buy ten and give them to your friends - especially those who are uninformed about gold. There is a decent quantity discount for preorders.

If the preceding sounds self-serving ... it is and it isn't. In the "isn't" category; how would you like a million people to read the following quote - one of many of this type - from the novel?

Background for the Scene: An ESF agent, clueless about gold market issues, stumbles upon the Washington Agreement in connection with an investigation. He has just finished researching it on the Net.

Brian thought, if I did my accounting that way, I would go to jail. How could the central banks still have the same amount of gold after fifteen years of selling? Why did they count all the leased gold that had been sold into the market as actual gold in their vaults? They would be lucky if they had half of those 30,000 tons left. A few pieces of paper with promises on them don't weigh 15,000 tons.

He added a mental note. I'm going to buy my wife that gold necklace, maybe even a few gold coins for our savings.

Having put in a full day, Brian went to bed. He had a mild discomfort in wondering about the last line from his notes. There was some contrary opinion on the Net that said the U.S. might be a covert participant in this leasing practice.

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