Finding Leverage in the HUI
The HUI Spread - So far, So good

PMtrader
October 4, 2004

In several prior editorials, an analysis of the HUI spread (= POG - HUI) was introduced. In particular, the work shown in these prior two links (The HUI Spread - An Update, and The HUI Spread in the Golden Bull) introduced the idea of tracking the 50 day moving average (dma) of the spread. It was determined that the 50 dma issued good buy and sell signals since the inception of the golden bull, in roughly November of 2000. In the most recent referenced essay, an obvious question was begged. Will the 50 dma again prove to be a valuable indicator going forward?

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 May of 2000 through market close of October 1, 2004, and thus encapsulates the current bull market in gold.

Now consider the annotated plot below. Two primary sets of daily data are given: the HUI, and the Spread. The spot gold price has been removed from the plot, so as to better highlight the fundamental relationships being discussed. In addition to the primary data sets, the 50 dma (shown as a dark green line) and the linear trend line (the purple line) for the Spread are given.

Once again, 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 this indicator.

Keeping with the conventions of the prior paper, the green vertical arrows correspond to buy points and the red vertical arrows correspond to sell points. This time, white annotated arrows (spanning adjacent buys and sells) were added to assess the historical percentage gains from the use of this indicator. The relative percentage gains, as shown, were simple approximations gleaned from inspection of the plots. They represent gains achievable without placing too much of a burden on timing the exact highs and lows - a very comfortable result as timing exact buy and sell points is problematic at best.

Now, to address the fundamental question - will the 50 dma again prove to be a valuable indicator going forward? First, notice that by all appearance, the 50 dma average has peaked, and has thus given another buy point. Notice also that in addition to the now obvious turn, the distance above the linear trend line is commensurate with previous buy points.

With the peaking of the 50 dma, what can we expect about the HUI performance if the indicator rhymes with its historical performance? The HUI should gain between 60 and 120 % over the next 10 to 12 months. Using an approximate buy point of 200, this implies HUI values sometime in mid to late 2005 of between 320 and 440. Correspondingly, the spot price of gold should reach values in the range of $500 to $600 per ounce - using the ìrule of 200î.

These latter prognostications are difficult to believe for those entrenched in the daily machinations of the gold market - even though many believe that the fundamentals more than warrant such performance. Furthermore, the astute reader will notice that the fundamental question has not been answered. Will the 50 dma for the Spread again be a good indicator? Acknowledging the nature of probability in studying the markets, we will leave this question to be answered by time - the ultimate soothsayer. All we can say at this point is, So far, So good.

October 3, 2004
Terry L. Krohn
PMtrader
Email: PMtrader

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Copyright © 2004 by Author - Reproduced with Permission.

About Terry L. Krohn
 
Mr. Krohn is a research scientist living in the Washington D.C. area.

His field of expertise is scattering physics - the analysis of interactions between electro-magnetic waves and matter.

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