HUI – Preparing for Launch soon!

by Eric Hommelberg
Jan 21, 2007

Scared about current bearish sentiment in gold and its shares? Sold your gold shares recently? Well, not so clever since the gold shares are dirt cheap these days and as the saying goes, ‘buy low and sell high’. So investors selling their gold shares into weakness lately did so because of fear not because of fundamental reasons. Sure enough that fear has been boosted lately by many analysts calling for the end of the commodity boom and extrapolating that bearishness into the precious metals arena.

Although I don’t think the commodity boom has ended we shouldn’t consider the precious metals as a commodity since gold is a currency and trades like a currency. Ax explained in my piece Gold & US$ there’s not a snowball’s chance in hell for gold to come down significantly since it requires a sharp appreciation of the dollar. Now China publicly admits that it’s looking for ways how to use their excessive foreign reserves which are now exceeding the one trillion dollar mark. FED chairman Bernanke has warned congress that it should take action in order to cope with the tremendous up-coming fiscal liabilities due to the explosion of baby boomer retirees (as of 2008). Bush just announced to send another 20.000+ troops to Iraq. Some estimates are projecting the total costs of the Iraq war close to two trillion dollars. You really think this is all dollar positive? No, of course not but again, I’m not predicting a major dollar crash since it is in no ones interest to see a dollar collapse and yes, maybe central banks will do whatever they can to halt (slow down) the dollar’s slide but the thing is that a major dollar appreciation is out of the question and so is a major gold decline. On top of this we do witness an increase of gold demand while gold supply will be in decline to ‘flat’ at best coming years. The bottom line is that gold’s fundamentals do still point towards much higher gold prices the years ahead.

So with that in mind all what gold investors need to do is to spot the right ‘BUY’ opportunities. Sounds simple right? Just spot the right ‘BUY’ opportunities but how?

Well, as my long-term readers know I’ve been using relative charts for years now in order to pick major bottoms in gold (and HUI) therefore providing the investor with  unique ‘buy’ opportunities.

The rGold chart is a chart which divides the gold price against its own 200 dma. So if gold trades exactly at its own 200 dma then the rGold chart will display a value of ‘1’.

Now when the rGold value drops below ‘1’ (gold dropping below its own 200 dma) then the odds are you will be facing a bottom rather sooner than later. Simple fact is that during this entire gold bull market the rGold value never dropped below a value of 0.95.

During the second week of January the rGold value dropped below 1 again and we notified our members that the gold correction could be very well nearing its end.(see Gold – Correction nearing its end?)

Now let’s take a peek at the updated relative-gold chart:
 

This relative gold chart tells us some interesting things:

• Gold is nowhere near a major sell yet!
• The relative chart bottomed twice just like it did in May/July 2004 and June/July 2005. When you examine the chart closely you’ll notice that the second time the rGold chart bottoms it doesn’t reach the same depth as the first bottom. In other words, the June 2004 bottom is higher than the May 2004 one, the July 2005 bottom is higher than the June 2005 one and the odds are that the January 2007 bottom will be higher than the October 2006 one.

Well, it seems that that’s exactly what happened since the relative gold chart bottomed at 0.98 and is clocking a value of 1.02 now.

So if gold did bottom indeed, what can we expect from gold coming months?

Well, sure enough gold will finds its hurdles on its way up again, the chart bellow shows a short term down-trend which could be taken out to the upside anytime now. Furthermore this chart visualizes the fact that the most recent correction is nothing to worry about compared to what happened in May 2006:

This chart tells us:

• Recent correction remains a small correction compared to what happened in May 2006.
• The uptrend can resume its trend as soon as it breaks the recent down-trend to the upside.
• A price objective of $685 is in the cards.

OK you’ll say, but what about the gold stocks then? They have been lagging the price of gold lately, what can we expect from the HUI coming months?

Well, good question, as mentioned earlier many investors have dumped their gold shares because of fear, fear for the end of the commodity bull fueled by many bearish analyst reports.

Let me begin with something you should consider carefully. When gold goes up so will the gold shares. It’s simple, when gold goes up, the company’s net-value will rise due to an increase of valuation of its proven gold reserves. That’s why Durban Deep sky-rocketed from 50 cents to $50 in the late seventies just because of exploding gold-prices.

Now some analysts do challenge the relation ship of gold and HUI but all I can say is they are flat wrong. Even a chimpanzee could see the strong correlation between gold and its shares on the chart below:

This chart tells us:

There is a strong correlation between gold and its shares indeed and that the HUI is underperforming gold lately.

Well, that’s an interesting note since we concluded before that gold could resume its upward trend rather sooner than later so what do you think the HUI could do in order to catch up with gold again?

Let’s zoom into the chart above and see what the gold/HUI relation was during the last 12 months:

This chart tells us:

• HUI is underperforming gold indeed lately
• HUI clocked a value of 360 three times during the last 12 months at $635 gold.

So here we go, the HUI traded at 360 on previous occasions when gold traded at $635, so why is the HUI lagging now?

The answer is simple, sometimes the gold shares do run ahead of gold and sometimes they lag the price of gold. So the gold shares move from undervaluation against gold towards an overvaluation against gold. This cycle continues to repeat itself over and over again and is visualized perfectly by the Gold/HUI ratio chart.

When the HUI clocked a value of 360 in early September 2006 while gold traded at $635 the Gold/HUI ratio was 635/360= 1.76. This reflects the lower range (overvaluation of gold shares vs gold)  of the gold/hui ratio over the last 12 months. Currently the HUI is trading at 318 while gold is again at $635 so current gold/hui ratio level is 635/318=2.0. This reflects the higher range (undervaluation of gold shares vs gold) of the gold/hui ratio over the last 12 months

So during the last 12 months the overvaluation of gold shares vs gold was reflected by a gold/hui ratio < 1.8 while the undervaluation of gold shares vs gold is reflected by a gold/hui ration exceeding  the 2.0 mark. The chart below tells it all:

This chart tells us:

• Gold stocks are nowhere near a major ‘SELL’ yet!
• Gold/hui ratio chart says we’re in a major ‘BUY’ zone for gold shares now!

It should be noted that all previous major HUI up-legs did start from severe under-valuations against gold so we might have a perfect setup here for the gold shares.

Summary:

• Gold’s fundamentals remain intact and continue to point towards much higher gold prices the years ahead
• Relative gold chart says gold has bottomed
• Gold could resume its uptrend anytime soon and has a price objective of $685
• HUI is currently undervalued against gold
• Gold/HUI chart says HUI (gold stocks) is (are) a major ‘BUY’ right now.
• All previous major HUI up-legs started from a sever undervaluation against gold

Now you might wonder what could be in the cards for th HUI in case gold does resume its upward trend indeed and reaches $its price objective of $685

Well, nobody can predict future price movements and neither can I but if history could be of any guide for us and gold will reach its price objective of $685 indeed then the HUI could reach a target of 400 which translates itself into a 25% gain from current levels.

Now how could you as an investor profit from such a move? Sure, one could buy some major gold producers which do track the HUI perfectly (eg Newmont) but as our long-term readers know we always focus on junior mining companies making  discoveries or in the early stages of a discovery phase.

Companies making discoveries can be phenomenally profitable thereby outperforming the HUI by great margin, see performance table 2006 below: (the TGDL TOP 10 reflects our favorite TOP 10 discovery stocks in 2006)

 
performance table 2006

The fact that companies making discoveries can be extremely rewarding was proven up last week when a junior announced a major gold discovery in Nevada. Its shares exploded by +50% within a week.  (see our discovery alert we send out on January 10)

If you would like to profit from such valuable information then please join us today so you can start enjoying the power of discovery. Sign up info can be found HERE

Best Regards,

Eric Hommelberg

The Gold Discovery Letter/
The Gold Drivers Report

www.golddrivers.com

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