   |
|||
Gold/HUI Divorce?By Eric Hommelberg The correction in Gold stocks never seems to end and gets more frustrating day by day. Even on solid up days in Gold the HUI manages to go down. On Tuesday April 26 the HUI went down 4.35 points despite the $3 rise in Gold. Emotions are running high, panic is kicking in,investors are running away in droves losing faith in the once almighty HUI. Some Gold advisors are jumping onto the bearish side as well leaving the gold share holders confused about what to do. But there's light at the end of this long dark tunnel. Extreme under valuations never persist for ever and it's my strong believe that we might be close to a bottom here. Now what to expect from the
HUI coming weeks? A continued crash towards the 160's or even
150's area as some analysts do suggest? Or a rebound triggered
by rising Gold prices? Well, I just don't see the HUI crashing
further without a severe decline in the price of Gold. Why not?
A price of Gold above $420 and a HUI at 150 just doesn't make
sense, it would lead to the greatest spread ever between Gold
and HUI which of course CAN happen but very unlikely to happen
imo since pushing the extreme undervaluation of the Gold shares
into even higher extremes is like pushing a car hill upwards
by hand on a road getting steeper every single feet. Needless
to say that resistance will increase by every single step you
take and at some point you'll reach the limits of your muscle
power and have to give up thereby surrendering the car to natural
forces (gravity) which guarantees the car a downhill ride. The
car starts rolling down thereby gaining speed and momentum. Nobody
in his right mind is going to step in front of this rolling car
in order to halt it. People willing to push the car by hand again
will wait until its speed and momentum are reduced to zero. This article will show that current under valuation of Gold shares (related to Gold) is at such an extreme that it'll be hard for short sellers to push these extremes to even higher levels. So the only option for a continued HUI crash seems to be a severe decline of the Gold price itself. Therefore it's useful to take a look at the Gold charts first and see what they have to tell. The chart below shows Gold in a classic triangle pattern. If Gold can manage to break out to the upside a powerful rally could emerge which could launch the price of Gold towards the $470 - $480 area. See chart below.
We saw this pattern before in summer of 2003. After months of chopping in a triangle gold broke out in August at $366 and never looked back. The price of Gold managed to reach its price projection of $425. Fine you'll say, but Gold can break the triangle pattern to the down side as well and isn't that what the Gold shares are predicting now? Sure, anything can happen but if we take a look at the three year chart of gold we'll see a nice picture of a bull market at work. We clearly see the similar patterns of summer 2003 and now. We also see the Long Term Up trend line which provides solid support and will continue to do so as long as the bull market in Gold stays intact. The fundamentals carrying this bull market in Gold so far only got stronger over time and will continue to do so for the next coming years. (dropping dollar, increase inflation, decrease of gold supply, increase of demand, sky-rocketing oil prices etc.. for details see Gold Drivers Report at www.golddrivers.com ). So if the fundamentals for Gold are changing in favor for Gold over time I see no reason for Gold to crash below $400 and taking the HUI down with it to the 150's area.
Long Term Up trend line provides solid support. If there's solid support indeed then a break-out of latest triangle pattern will likely to be on the up-side. Again, as Richard Russel says, markets can do anything so nobody knows for sure, the only thing we can do is to determine probabilities and I think that chances are in favor for Gold to break-out to the upside with a price objective of $470 -$480. To illustrate that $480 Gold talk isn't absurd at all just look at the growing amount of analysts and industry experts pounding the table for $500 Gold this year. Jim Sinclair of JSMineset repeats day after day: Gold is heading for $480, $529 and to $1650. Bobby Godsell CEO AngloGold is optimistic. AngloGold Sees Gold Soon
Trading at or Above $500/oz
On April 28 GFMS came out with some bullish Gold news as well: Dollar could push gold to
$500 level in 2005
It should be obvious that $500 Gold talk is no nonsense any longer and well accepted among many analysts and industry experts. Now what could happen to our beloved Gold shares when Gold is heading North to $470 - $480? Current sentiment regarding Gold shares is at an absolute low these days. Buyers are hard to find while sellers are lining up to sell all they have. Fear about crashing Gold stocks is at an high. All excitement has been killed and yes, it seems that Gold and the HUI are completely disconnected these days. Well, that's exactly the reason why I buy. Buy shares when they're cheap and undervalued to Gold. I'm not worried at all that this undervaluation to Gold will persist forever! Why not? Because history tells me so! Look, Gold shares move in tandem with Gold to the upside but sometimes they move a bit too fast ahead of Gold (eg Nov/Dec 2003) and sometimes they lag the price of Gold (eg April 2005). Neither situation does persist for ever, it's like a pendulum, it swings from undervaluation to overvaluation and back all the time. To prove this point just take peek at the Gold/HUI chart below:
This chart proves beyond any doubt that extreme undervaluation in Gold shares don't persist forever. Extreme high RSI readings do mark extreme undervaluation of the Gold shares compared to Gold and vice versa. As you can clearly see high RSI readings don't persist for ever. Period! The Gold/HUI ratio has proven to be a reliable indicator for picking HUI bottoms. Only one prediction failed more or less and that was RSI top V in December 2004. The reason for that failure was that Gold itself was at an high ($456). Indeed the undervaluation of the Gold stocks disappeared as expected but since the price of Gold came down rapidly the Gold stocks didn't have a snowballs chance in hell to rally although the HUI managed to hit 227 later on thereby booking a tiny profit of 9.6% since bottom V. As you can see all previous RSI peaks (I, II, III and IV) were a perfect call for a solid bull rally in Gold stocks. Again, the difference between the predicted Gold stock bottom V and I, II, III and IV was the direction of the Gold price. Bottom V was accompanied by a top in Gold not a bottom. Now here's where it gets interesting. If the Gold/HUI ratio predicts a bottom in Gold stocks (which it is doing now) AND the price of Gold is heading north then a powerful rally could emerge in Gold stocks. On previous occasions it has led to HUI rallies of at least 50% over a few months time period only. Now before we jump to any conclusion let's take a look at the HUI chart itself. Does it justify a new rally as the Gold/HUI ratio chart suggests?
The HUI chart confirms the oversold condition of the Gold shares indeed and does not contradict the Gold/HUI ratio prediction of a bottom in Gold stocks. We already saw that Gold itself has to declare direction within a month. The HUI chart is similar, it has to break-out of its current wedge pattern soon. If Gold manages to break-out to the upside the HUI simply has to follow since it's highly unlikely to push the extreme undervaluation of the HUI compared to Gold to even higher extremes. . So I would urge investors to pay serious attention coming days/weeks in order to see how these patterns will solve. Readers interested in a daily update of the Gold/HUI charts can visit: http://www.golddrivers.com/goldhuicharts.htm Conclusion: If Gold can manage to break-out to the upside of its latest triangle pattern, a powerful HUI rally could emerge which could lead to new HUI highs within 6 months. Highlights:
Eric Hommelberg Additional notes with regard to current sentiment: I didn't plan to include these remarks but maybe they can be of help for the confused gold share holder:
As said before fear for a continued HUI crash is at an high these days. It's difficult but as an investor you should do whatever possible to bypass your emotions and keep your focus on the hard data. Now let's have a look gain at the HUI chart above. What you see is the HUI diving far below its 200 dma. Also these situations don't persist for a long period of time. Whenever a Gold stock moves too far away from its 200 dma and gets over-extended gravity will pull it back. Don't believe me? Well read on. Now let's go back to May 2004, see chart below; As you can see this picture wasn't a pretty one, it looked quite ugly. According to many analysts the bull market in Gold stocks was over. Yes, sentiment back then was the same as it is today, as bearish as it can get. A reader of James Sinclair wrote to Jim: Jim, I simply cannot take the
pain in gold shares. The similarity is striking
with today's situation, a reader of Bill Murphy's Lemetropolecafe
wrote to Bill on April 28,2005: Now back to May 2004 again, what happened next? As I said before the HUI can't escape its 200 dma permanently. When the HUI moves too far ahead from its 200 dma and gets over extended gravity will pull it back. Therefore deeply oversold conditions in the HUI are mostly followed by sharp upward corrections, no matter if the primary trend is bull or bear, see chart below:
This chart clearly shows that no matter what happens, stocks always tend to go back to their 200 dma from time to time, therefore I was confident to write my piece 'KISS on Gold' on May 14, 2003 in which I suggested a powerful HUI rally based on its own historical behavior, see chart below:
Furthermore I wrote (May 14, 2003):
Well, I had a lucky shot I guess since the HUI managed to rally indeed above 200 within three weeks. Again, similarity between April 2004 and April 2005 is striking. April 30, 2005 NOTE: Readers interested in future GDR updates can drop a mail here.
321gold Inc |
