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,
November 11, 2006
A Personal Note
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Copyright © 2006 by Author – Reproduced with Permission.
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