-- Posted Friday, 21 September 2007 | Digg This Article
HUI break-out confirmed! - HUI on its way to 450+
by Eric Hommelberg
September 21, 2007
Gold: $730 / HUI: 400
In case you missed it, gold and its shares are on the fly in a sense we haven't witnessed for a long time. Yes, gold is showing its muscles and demands to be recognized as a true safe haven again, a role which it has fulfilled for thousands of years. For our readers the sudden surge may not come as a real surprise since in our Sept 03 dispatch we clearly stated that gold was poised for take off and gold shares ready for launch:
Excerpt TGDR Gold/HUI update "Gold - Poised for take off!" (September 03) –
Gold: 673 / HUI: 324
Believe it or not but gold and its shares are poised for a powerful year end rally and yes, it's my strong believe that by year end investors will be looking back at this period wondering how they could have been so stupid not to see this opportunity.
Last week we notified our members already that the gold shares sell-off was way overdone which translated itself in a HUI reading as if gold were trading at $550! So yes, we argued that the time was right to start accumulating the gold shares as the saying goes "BUY Low, SELL High!"
Gold shares selling as if gold were trading at $550 is a huge anomaly indeed and as we stated in our Gold/HUI update "Bloodbath - part III" such extremes never persist for a long period of time so something has to give. Well, it seems the HUI has rocked bottom indeed and is on its way back to levels one could expect with gold prices of $660+.
Well, here we are just a mere three weeks later and gold took off indeed and the gold shares are catching up on gold. The extreme undervaluation of the gold shares is melting away but the best part is still ahead of us. The fact that the HUI finally breached its long-term resistance at 360 bodes well for the gold shares since all previous major HUI rallies were given birth after a long consolidation period. The HUI data over the last 5 years do speak for itself:
- HUI break-out 2003 at 150 yielded a gain of 60% in 5 months time.
- HUI break-out 2005 at 250 yielded a gain of 66% in 8 months time.
- A similar HUI break-out these days at 360 could result in HUI trading above 450 levels within 6 months after break-out!
The reasons for gold and its shares to take off were summarized in 'Gold - Poised for take off' as:
- Dollar heading to new record lows within 6 months from now
- Gold demand exploding in Asia and Middle East
- COMEX Gold option open interest shows potential major up-leg in gold (courtesy of Adrian Douglas)
- HUI extremely undervalued against gold
Well, it seems we got it all we wanted since gold appreciated by $60+ while the HUI gained by 70 pts. So far so good but where do we go from here? Aren't the gold shares and the yellow metal a bit over-bought at this point? Do we face the risk of a double top at $730? Sure enough we'll be hearing many of these overbought/double top tunes coming days and yes, sure enough no bull market goes up in a straight line but as always please keep the 'big picture' in mind which says --> declining dollar, increasing demand, decreasing supply and higher inflation rates all leading towards higher gold prices for years to come. Gold exceeding $1000/oz before the end of this decade seems a sure bet to me.
In our piece “Gold- poised for take off" we stated that it only seemed to be a matter of time before the FED would start cutting its FED Funds rate in order to prevent a recession or even worse a derivatives meltdown which could steer the US economy into a depression. Well, we didn't have to wait for that long since that's exactly what the FED did this week. The surprise however was the size of the rate cut since most observers expected a 0.25% rate cut instead of the announced 0.5%. What happened next was expected, stocks, gold and its shares took off just like we mentioned in our previous piece, we wrote:
"many experts believe that Bernanke will have to cut the FED Funds rate anytime soon. In case that happens the dollar will resume its downtrend at an accelerated pace and gold and its shares will take off!" END.
It all seems like 1987 deja vu again. Greenspan slashed the FED Funds rate by 60 bps as a response to the October '87 stock-market crash in order to prevent a 1929 style crash. The result was a tanking dollar and skyrocketing gold and gold shares. The gold shares appreciated by 50+% in just three weeks time while gold rose 10%.... The dollar declined by about 9% during the remainder of the year.
Furthermore we concluded that no matter how you slice it, the outlook for the yellow metal towards year end is bright! Despite the fact that the outlook for the yellow metal may look bright many investors were afraid that gold stocks could even sink further after the blatant sell-off in August which lead to a HUI valuation as if gold were trading at $550! We informed our readers (Gold/HUI Update Bloodbath - part III) that blatant sell-offs like these don't happen that often and do present an excellent opportunity to buy some of your beloved gold shares. The thing is that the gold shares were dirt cheap those days and as the saying goes': 'BUY low and SELL high'.
The message to panicked gold share holders is simple: Yes, volatility is at extremes these days, but that's all in the game, it's a typical characteristic of the gold market and yes there aren't that many investors out there who have the stomach to ride this game till the end. As the saying goes, if you can't stand the heat then stay out of the kitchen, but if you are a true believer in gold's historical role of a safe haven then these times do provide great opportunities. The forced margin selling has pushed the gold shares to extreme oversold levels indeed, levels only seen a few times during this entire gold bull market which started in 2001.
The ones who had the nerves to invest at rock-bottom levels lately are rewarded big time. Now to illustrate the extreme undervaluation of the gold shares vs. gold lately let's take a peak at the Gold vs. HUI chart of Sept 03, 2007
Gold vs. HUI chart - September 03, 2007
This chart showed the extreme divergence between gold and its shares, the HUI was trading recently at same levels as with gold at $550! We concluded that such extremes never persist for a long period of time so something has to give, or the gold price has to come down or the gold shares have to catch up soon. Well, it seems the latter is already well underway since the HUI is rising faster now than gold.
The updated Gold vs. HUI chart confirms the statement above:
Gold vs. HUI chart - September 20, 2007
Now sure enough many analysts will argue that we reached a double top at HUI 400 and $730 gold so we should be prepared for a sell-off here. Well, as stated earlier, we might encounter some corrections here and there on our way to HUI 450 but I'm quite confident we find ourselves in the middle of this move. The relative charts are showing us exactly what I mean since there's still a lot of up-side potential before we’ll be hitting major sell-zones. Please take a peak at the updated relative charts and judge yourself:
relative HUI chart:
The r-HUI chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for the gold shares in the past 5 years.
The relative HUI chart demonstrates beyond any doubt that there's plenty of up-side potential left before we’ll be hitting major sell areas.
The relative gold chart shows a similar pattern:
relative Gold chart:
The r-gold chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for the gold shares in the past 5 years.
Also the relative gold chart shows plenty of up-side potential before hitting major sell-areas!
- Dollar broke important major support levels to the downside
- Gold and its shares exploding after FED Funds rate cut of 0.5%.
- A similar emergency rate cut in 1987 launched the gold shares by 50% in just three weeks time.
- HUI extreme undervaluation against gold is disappearing
- Resistance expected at $730 gold and HUI 400 due to fears for double top
- Minor corrections are inevitable but we’re most likely in a major HUI up-leg towards 450+ within the next coming months
Now where to go from here?
Well, if you are a believer in gold's future then these are the time to increase your gold share positions since the gold shares are still selling at fire sale prices. In other words, downside risk is low. Higher gold prices in the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.
Here at golddrivers.com we track promising junior companies which we believe could be huge winners before this decade is out. If you would like to participate you could opt for a free trial subscription
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-- Posted Friday, 21 September 2007 | Digg This Article
Previous Articles by Eric Hommelberg