HUI & Gold:
Moving on to Moving Averages
Over the last many years, I've written a
considerable number of editorials, many of them focusing on spread
analysis - (HUI index minus the Price of Gold). In another editorial
entitled "Finding Leverage in the HUI", I introduced a time-independent
valuation criteria termed the "Rule of 200". At that point in time - with
the POG still chained below 400 - the HUI index was acting linearly with
respect to the POG. In other words, the spread (since subtractive) was a
constant and roughly equal to 200.
More recently, in a paper entitled "HUI vs. Gold:
Back to Fundamentals", I determined that the fundamental relationship
between the HUI and Gold had morphed. After crunching the numbers for the
HUI since its inception, the averaging formula "HUI = 2/3 * POG - 80" was
determined. The purpose of this paper is to meld the spread ideas with
this prediction methodology originally introduced with the "Rule of
200".
In the graph below, the predicted values were
determined using the most recent averaging formula given above. The 50 day
moving averages (dma) of actual versus predicted values for the HUI are of
interest. In broad-based terms, when the red line is above the blue line,
the mining shares in the HUI are heating up and the HUI as an index is
outperforming its historical norm. Similarly, when the red line is below
the blue line, the sector is underperforming.
I have highlighted some (but
not all) behavior of these two moving averages. In particular, scrutiny of
the plot above shows that optimum buy points in the HUI most often
come fast and furious - sort of like buying when everyone is screaming
sell and there is blood on the street. Sell points, however, seem better
characterized by longer periods where one can choose the timing - perhaps
best achieved by increasing mental stops (and sticking to
them).
Also worthy of note is the
crossover (or sometimes just close approach) of the moving averages. Some
of the best buy points of this multi-year gold and silver bull are
indicated by these crossover points (regions). Note that the steep drop of
the HUI ending in June of this year was flagged as a buy point with a
moving average crossover point.
Currently, the moving
averages are running neck and neck. Although history is certainly no
guarantee, it is often telling - and what it is telling us now seems
obvious. We are yet months away from a sell point, and it is highly likely
that we will be setting new highs in both the POG and the HUI within the
next several months.
All the best,
PMtrader
November 11, 2006
A Personal Note
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