GOLD & HUI: Golden Opportunity to Buy Cheap
On August 13, 2003, we wrote: “We think that it is too early to lighten up (gold shares), considering that the gold price itself is far from being “overbought”.
At that time, gold was at $ 356.50. On Friday, it closed at $ 387.40 for an increase of almost 10%. Furthermore, the gold price remains in a solid up-trend and keeps pushing against the resistance zone at $ 390. Minor set-backs should hold at $ 370 but the next major move should take us above the $ 400 level for the first time in many years, an occurrence which will surely be noted and commented on by the media.
Now let’s have a look at where we stand with The AMEX GOLD BUGS INDEX (HUI) and see what has happened since our last report:
The long-term picture
As above long-term chart demonstrates, the HUI-Index moved into an up-trend at the end of the year 2000. At the beginning of the year 2002, the up-trend accelerated, broke out of the up-trend channel to reach a temporary high of 154.56 points.
A severe correction followed taking the index down to less than 100 points, but the fall stopped right on the up-trend line.
The up-trend was resumed and during this past summer, the index broke out above the old resistance level to reach 220 points for an increase of more than 500% since the bear-market ended.
At these levels, it appears evident that the “golden opportunity” to buy gold shares is no longer with us and that a correction down to more realistic levels is liklely.
Nevertheless, a lot depends on the gold price. Should it surge to levels above $ 400 during the coming weeks, no doubt gold shares will also rise.
The medium-term picture
Looking at the medium-term chart, the overbought situation of the HUI does not look too dramatic.
While we are certainly approaching the higher trend-line, we can also make out a new, higher up-trend channel and it may well be that any consolidation in the up-trend may stop at the middle-line, or around the 200 point level.
We would like to repeat that, at this stage, a lot depends on the next movement of the gold price, which, if it establishes itself above the $ 400, could cause the HUI-index to spike towards the 250 level.
Those who do not simply want to ride out the long-term trend and would not like to live through the next inevitable correction, could place sell limits twenty percent above the present prices in the hope of buying back at substantially lower prices.
The short-term picture
The short-term trend suggests that at present, the HUI-Index has the potential to move higher in the coming weeks, partly because it broke above the high reached on September 13 at 213.79 and partly because the correction after this new high has been very mild, milder, in fact, than most expected.
Gold shares are certainly much more volatile than the gold price, and many an investor suffers more while watching his gold shares gyrate. Sentiments of euphoria quickly turn into despondency.
Each investor has to decide according to his own temperament, whether he has a trader mentality or whether he prefers to ride the long-term trend.
We offer Portfolio Management services, and should you prefer to delegate the decision-making task to the experts, write us for more information at gold@pzim.com.
The following recommendations were valid at the time of writing, viz. at
and may no longer be pertinent when you read them.
Yours sincerely,
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
October 29, 2003
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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