HUI & POG - Spread Vs Ratio
PMtrader
Before proceeding with an update of the spread analysis, it may be of academic as well as pragmatic interest to answer the implicit question posed by the title to this paper. What is the fundamental difference between a spread and a ratio analysis?
Pleasingly - if perhaps surprisingly - the answer is simple. There is no fundamental difference. Below are listed three examples of spread analysis, and a recent example of ratio analysis.
Spread:
www.gold-eagle.com/gold_digest_04/pmtrader100304.html
www.gold-eagle.com/gold_digest_04/pmtrader090304.html
www.gold-eagle.com/gold_digest_04/pmtrader050204.html
Ratio:
www.gold-eagle.com/gold_digest_04/hamilton110504.html
So, why are these analyses effectively the same? Simple ... given two series represented by A and B, let's look at the two resulting series A-B and A/B. A little scrutiny reveals that the negative numbers in the difference (meaning B > A) map monotonically to the open interval (0,1). Similarly the positive numbers (meaning A > B) map monotonically to the open interval (1,infinity). {Of course A=B implies A-B=0, and A/B=1} Thus, the two methods are equivalent, and related by a simple transform.
In the specific case of the HUI analysis, B-A (as opposed to A-B) is compared to A/B, but an obvious and related equivalence applies. For the HUI, the spread seems preferable in that the linear trend line introduced in prior papers, and again shown below, would be aberrantly transformed in ratio space. On the other hand, ratios have become directly available from online plotting packages, making them more easily computed. Further, depending on the relative values of the series A and B, either a ratio or difference may be a preferable norm, as regards clarity of presentation.
Armed with how spread and ratio analyses compare, let's move on to the data presented below. As in the most recent paper on the spread listed above, 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.
First, notice the blue circles - connected by the blue arrows. They highlight a flat region in both the 50 dma for the spread and the HUI index, and they appear shortly after buy signals (the green arrows) have been given. Perhaps more importantly, is the subsequent performance indicated by the yellow arrows. So far, in this gold bull, these flat regions have been followed by a short dip, and then a stellar move to the upside.
Though due deference must again be given to the laws of probability, the conclusion from the most recent referenced paper seems to apply. 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 "rule of 200".
If history is any guide, the overriding conclusion about the current move in the HUI and POG is straightforward - the best is yet to come.
PMtrader
November 8, 2004
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