HUI - Bull Market Gains
This paper builds upon several prior editorials; an index of these editorials may be found at the link below.
www.gold-eagle.com/research/pmtraderndx.html
I had occasion to take a drive to Charlotte a few weeks ago and picked up a book tape for the ride - Timeline by Michael Crichton. I had read it before, but long enough ago that it was sufficiently fresh to be enjoyed. In listening this time, I noticed that Michael was using the podium, presenting a philosophy hidden within the pages of the science-fiction novel. One of the messages I gleaned was simple: We are a product of history, walking in a daze if we think otherwise.
There is an ongoing debate about the relative merits of fundamental versus technical analysis of the markets. For some, charting is nothing more than chicken scratches and of little intrinsic value. For others, charting is deemed the only thing worth considering...the philosophy, it's all in the price. But note that both schools of thought pay attention to history - time series data for technicians, and current and past events for fundamentalists.
It was a fundamental thesis that brought me to the gold and silver sector many years ago, and this same fundamental consideration keeps me here: The price of gold and silver are artificially low. The more research I do, the more convinced I have become that the original thesis is correct. I could spend hundreds of pages citing the results of this research, but I won't - there are other podiums for such an endeavor.
Neither do I ignore technical analysis. At its roots and in my opinion, technical analysis provides an alternative and complementary view of history. The HUI spread (Price of Gold - HUI) has provided one such view - particularly revealing when a moving average is employed. Shown below is the HUI spread analysis ranging in time from November 1, 2000 to the present day.
The dark blue arrows show spikes in the raw spread data - often seen as double spikes. They precede the purple arrows, which represent peaks in the moving average data. The thing to notice is that in the sense of back testing, this analysis has been very efficient (very few if any false positives) in predicting buy points in this multi-year bull market in gold and silver. The red arrows highlight these buy points. If this analysis continues to work going forward in time, it indicates that the recent (within the last few months) dip in the HUI index to the 275 level represented another good buy point for gold and silver shares.
In the plot below, the moving average data has been cleared away, but the buy points represented by the red arrows were maintained. The percentage gains and time required for the bull market moves are shown.
A question arises due to the narrow space between the purple and blue boxes: Is it too soon to begin another extended bull move? Looking at this figure alone, one could credibly argue that more consolidation was needed before another such move could develop. But going back to the first chart, we see that there has been a classical peak in the moving average data, which supports the conclusion that the bull move has begun.
In my opinion, one should never become too enamored with any given fundamental fact or any particular analysis technique. The market will always have the last word. However, if the spread analysis continues to work as in the past, the implications are worth noting. Using an average of 130% gain for the latest buy point near 275 implies a price objective for the HUI of about 590 within the next 12 to 18 months.
All the best,
PMtrader
September 6, 2006
A Personal Note
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Power of the Scepter is Available.
Get ready for the ride of your life as the journey into a realm of financial corruption continues with Dr. Paul Malone...
Power of the Scepter - sequel to Eye of the Pyramid - is available exclusively (pre-release) from Axiom House. Shipping will begin next week. I'm thrilled by the way the novel turned out. Here's a link to find out more.
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For those of you in the Washington D.C. area, you might wish to attend the book signing being held at Old House Vineyards on September 9. Directions and further details can be found at the link below.
Copyright © 2006 by Author - Reproduced with Permission.
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