-- Posted Sunday, 21 May 2006 | Digg This Article
NOTE: This piece contains two articles which were send out to our members on May 19 before market opening and the other on May 19 after market hours
In case you’ve missed it, gold and its shares dropped like stone this week.
What’s going on you might wonder, when will this bleeding stop? Should we bail out en masse? Or should we just sit tight and wait for the storm to calm down a bit..
Sure enough we did receive many questions regarding this current wash-out and as promised I’ll give you an update of the current situation including updated Gold/HUI charts.
I sincerely hope this update will help you fellow investors understand about what is happening these days and therefore providing some comfort in holding on to your shares no matter what happens in the very short-term..
In times of panic selling across the board it’s always good to take a few steps back and take a peek at the big picture… If you do so you’ll notice that nothing has changed a bit. The HUI uptrend is still in tact and the under-performance of the shares vs gold is running into its very end.
Yes, you’re reading this right, the gold shares are on the verge of outperforming the yellow metal again within days from now. This doesn’t mean that the shares can’t go down any further from here but the down moves will be limited against potential down moves in gold.
I preferred to write this update in a typical Q en A session since that’s the best approach imo to tackle the questions which came our way lately…
Q: Why were you so confident in calling for a major upswing in the HUI in your piece ‘HUI: Major upswing in the making? You said that a rapid decline in the gold price could solve the Gold/HUI imbalance as well. In fact that’s what happened. Could you please comment?
A: Good question. You know the problem with calling tops in an ongoing bull market is that a top can only be recognized AFTER the top has been established.. Yes, I’m aware of the fact that many gold writers did call for a top but mind you, many of them have done so since gold $525.. Coming out now at gold $680 telling your clients ‘I told you so’ is a big joke imo… Nevertheless we have to deal with the current drop in gold and prepare ourselves for the next up-leg in the gold shares which could turn out to be extremely profitable!
Q: The imbalance between gold and the HUI. Has it been solved by now due to the severe drop in gold?
A: No, in contrary, the rapid decline in gold sparked a real panic selling of the gold shares across the board pushing the Gold/HUI imbalance into even higher extremes. The chart below tells it all, such an extreme as we’re witnessing today is really exceptional. Such extremes simply don’t persist for a long period of time.
Q: Could you please explain about the Gold/HUI ratio. Why should it drop over time in an ongoing bull market as you have stated?
A: Sure. It’s simple, gold shares (gold mining companies) do rise faster than gold itself in a rising gold environment. The evidence is there for everyone to see. Gold did rise by 160% since 2001 while the gold shares (HUI) rose by a stellar 1000%+. Sure enough in a declining gold environment exactly the opposite happens.
So if the HUI rises faster than gold the Gold/HUI ratio drops!
The chart below is a big picture overview of the gold/HUI ratio of the last 10 years.
This chart proves beyond any doubt that the thesis mentioned above is correct!
This chart clearly demonstrates that the latest ‘spike’ in the gold/HUI ratio is an anomaly so therefore most probably it won’t be long-lived…
Q: Some analysts argue that the relation ship between gold and gold shares simply doesn’t exist since gold shares they argue are just financial assets so therefore they have nothing to do with gold. It’s a different story they say. Could you please comment?
A: Well, I’ve heard that statement many times but I simply disagree. Gold investors of the seventies remember all too well Durban Deep rocketing all the way up from 50 cents to $50. Do you really think that had nothing to do with the steep rise in gold to $850? I always base my opinions upon hard data. Well, anyone who studies the raw data of gold and the shares will conclude that there’s a very strong correlation between gold and the shares (HUI). The chart below tells it all.
What this chart clearly reveals is that there is a strong correlation between gold and the shares indeed but secondly it reveals an extreme anomaly these days which was indicated by the gold/HUI ratio chart as well!
No, when we zoom in to the last year of this chart, things become even more visible, see chart below:
Again the strong correlation between gold and the shares is clearly demonstrated here just as the strong anomaly lately…
This chart leaves two options open.
- If Gold can hold its current strength, the HUI should catch up to gold thereby challenging the 400 mark rather sooner than later
- Gold will go down to the $600 area in order to catch up with the HUI.
Q: The recent drop in the gold shares, did it reverse its uptrend?
A: No, not at all. As you know I’ve maintained the view that ever since the HUI broke out of its long-term resistance level of 250 it could make a similar move as when the HUI broke out of it long-term resistance at 150 in 2003. Back then it rose by a stellar 72%. A similar move these days would launch it towards the 430 mark.
In fact the major uptrend which started in May 2005 at HUI 165 is still not challenged. The chart below tells it all:
This chart says:
- HUI heading into oversold territory fast thereby preparing itself for short-term bounce. (up-wards)
- This current down-move is similar as the one in March this year whereby the HUI broke its 50 dma to the down-side but found support at the B uptrend line. HUI closed at 324 today while the B uptrend line provides support at 320.
Q: What do you think, is this correction almost over?
A: Look, the key question here is: ‘what will happen to gold’ . there are strong rumors in the market that the Bank of England is intervening heavily in order to break down the price of gold. Sure enough no-one can tell what that means for the short-term direction for gold.
Yes, I am confident that the Gold/HUI anomaly will disappear and yes even if the gold price heads down from here, it will be eventually seen as a short dip in the long-term bull market in gold. Please think about the year of 2010, not of next week.
So to answer your question more specifically:
If gold can hold its strength then the HUI will catch up rather sooner than later..
Conclusion:
The current HUI drop is way overdone and leaves no other option open than:
- If Gold can hold its current strength, the HUI will catch thereby challenging the 400 mark rather sooner than later
- Gold will go down to the $600 area in order to catch up with the HUI.
END.
May 20:
Gold/HUI Anomaly – Turnaround is there!
by Eric Hommelberg
May 20, 2006
I don’t know about you but I’m happy with today’s HUI decline of 2.8 pts. What? Having lost my common sense? Did I finally convert myself to the short side of the HUI trade? No dear fellow investors, in contrary, today’s action in fact surprised me even beyond my own imagination and its my strong believe we’re heading towards a buying opportunity of a lifetime here.
In yesterday’s dispatch I wrote:
The HUI uptrend is still in tact and the under-performance of the shares vs gold is running into its very end.
Yes, you’re reading this right, the gold shares are on the verge of outperforming the yellow metal again within days from now. This doesn’t mean that the shares can’t go down any further from here but the down moves will be limited against potential down moves in gold. END.
Well, we didn’t have to wait for long since that’s exactly what happened today. Gold dropped by $25 while the HUI managed to end up at……….
So what does this all mean?
Let’s first review yesterday’s HUI chart in which I pointed out that the HUI uptrend which started in May 2005 was still in tact:
I wrote:
This chart says:
- HUI heading into oversold territory fast thereby preparing itself for short-term bounce. (up-wards)
- This current down-move is similar as the one in March this year whereby the HUI broke its 50 dma to the down-side but found support at the B uptrend line. HUI closed at 324 today while the B uptrend line provides support at 320.
END.
Now let’s zoom in to the last three month of the chart and see what happened today, the B-uptrend line provided again support just like it did in March this year:
As you can see the HUI bounced off against the long-term uptrend line which started in May 2005.
Could this be the rebound of the HUI?
Well, as said before, the gold/HUI imbalance can also be solved by a much further dropping gold price and a slightly dropping HUI, eg such a performance as we have seen today.
So in order to answer that question we have to take a peek at gold first in order to determine its downward potential here.
Gold last move started by the end of March at $551. It moved all the way up to $730. Now, a 50% FIB retracement would bring it (gold) down to $640 while a 61% FIB retracement would bring it down to $619.. Although the latter can’t be ruled out it doesn’t seem likely to me. Why not? Well, gold’s 50 dma has provided solid support for gold ever since September 2005 and gold’s current 50 dma stands at 616. Gold’s 50 dma is rising by about 2 pts a day. So within a few trading days gold’s 50 dma will be surpassing the $619 FIB level..
Now let’s first take a peek at gold’s one year chart in order to see the importance of gold’s 50 dma.
Now let’s zoom into the last three months of this chart and add the FIB retracement levels..
This chart clearly demonstrates a huge support area in the $619 - $640 range. (50 dma arriving there within days)
Now with gold trading at $657 the downside seems to be limited by another $17 - $37. Now even if that were going to happen what do you think will happen to the gold shares?
My guess is not much since the Gold/HUI ratio has reached its peak and is dropping now. Todays phenomal action in the gold shares (HUI only drops a mere 3 pts against a dramatic $28 fall in gold) proves this point.
Mow whether or not gold continues its descent from here on towards the $620 - $640 area doesn’t bother me since the downside potential for the Gold shares is limited, but according to some credible market insiders the correction in gold could be over much faster as you might think.
Here’s what CNNMoney.com reported today:
Price of precious metal off the 26-year high scaled last week, but dealers see more upside.
CNNMoney.com
May 19, 2006: 11:05 AM EDT
· We might get people encouraged to buy back at these levels and drive it higher again," said Robin Bhar, analyst at UBS Investment Bank.
· James Moore, precious metals analyst at TheBullionDesk.com, said gold remained comfortably bullish in the long term given the Iran nuclear issue, high oil prices and generally bearish dollar sentiment.
· All that looked set to push bullion towards $850 later in the year, he added.
- Take out a coin and toss. Whatever it says just follow it... I will stick to my trading range of $670 to $730 for the moment until proven otherwise," said a bullion dealer in Singapore
END.
On top of that Bill Murphy of LemetropoleCafe send out an alert today to his members since he received word from a reliable COMEX source that the current drop in gold could be very well over by now:
Le Metropole Members,
It is a rare time when MIDAS receives feedback such as this from the Comex floor ... from the most veteran of Comex traders:
· They are convinced this is it as far as the down move, gold correction is concerned ... and believe this crushing has set up a move to $800. Their words, not mine.
· The orders coming in on the silver buy side are huge: 1,000 lots in size. They are limit orders on the downside, letting the spec selling come to them.
END.
Now what does this all mean?
Please think about it! We’ve seen that the gold/HUI ratio started its long expected decline what translates itself into gold shares outperforming the yellow metal itself.
Now what could happen if the bullish gold scenario painted above becomes reality is extraordinary. Gold shares outperforming gold in an rising gold environment is something you as an investor can only dream of. Such occasions are rare, it happened in may 2005 and to a lesser extend in may 2004. Since most of the gold shares took a nose-dive straight into deep oversold conditions lately their bounce back could be spectacular..
We will be watching our positions in our discovery portfolio on an intraday basis coming days/weeks and will alert our members on significant technical break-outs. Again, the coming ‘BUY’ opportunities don’t occur that often in a bull market and please remember that many gold analysts who are on the side lines these days are watching this on-going correction as a hawk waiting for a suitable entry point.
My point is that there could be easily a buying spree developing coming weeks which could prop up the gold shares almost as fast as they came down past week…
Readers who want to participate in our up-coming ‘trade’ alerts can join us today.
Subscription info can be found HERE
Stay tuned for more to come…
Enjoy your weekend,
Best regards,
Eric Hommelberg
The Gold Discovery Letter,
The Gold Drivers Report
www.golddrivers.com
-- Posted Sunday, 21 May 2006 | Digg This Article
