Finding Leverage
in the HUI
The HUI Spread - So far, So good
PMtrader
October 4, 2004
In several prior editorials, an analysis of the HUI spread (=
POG - HUI) was introduced. In particular, the work shown in these
prior two links (The HUI Spread - An Update, and The
HUI Spread in the Golden Bull) introduced the idea of tracking
the 50 day moving average (dma) of the spread. It was determined
that the 50 dma issued good buy and sell signals since the inception
of the golden bull, in roughly November of 2000. In the most
recent referenced essay, an obvious question was begged. Will
the 50 dma again prove to be a valuable indicator going forward?
In the data that follows and
by way of reiteration, ^GLDD was used as a proxy for the POG.
The data presented below spans the period May of 2000 through
market close of October 1, 2004, and thus encapsulates the current
bull market in gold.
Now consider the annotated
plot below. Two primary sets of daily data are given: the HUI,
and the Spread. The spot gold price has been removed from the
plot, so as to better highlight the fundamental relationships
being discussed. In addition to the primary data sets, the 50
dma (shown as a dark green line) and the linear trend line (the
purple line) for the Spread are given.
Once again, the linear trend
line is important, as tracking the 50 dma for the spread compared
to this linear trend line - as opposed to a particular constant
value such as 200 - seems to give a better highlight to the predictive
performance of this indicator.
Keeping with the conventions
of the prior paper, the green vertical arrows correspond
to buy points and the red vertical arrows correspond
to sell points. This time, white annotated arrows (spanning
adjacent buys and sells) were added to assess the historical
percentage gains from the use of this indicator. The relative
percentage gains, as shown, were simple approximations gleaned
from inspection of the plots. They represent gains achievable
without placing too much of a burden on timing the exact highs
and lows - a very comfortable result as timing exact buy and
sell points is problematic at best.
Now, to address the fundamental
question - will the 50 dma again prove to be a valuable indicator
going forward? First, notice that by all appearance, the 50
dma average has peaked, and has thus given another buy point.
Notice also that in addition to the now obvious turn, the distance
above the linear trend line is commensurate with previous buy
points.
With the peaking of the 50
dma, what can we expect about the HUI performance if the indicator
rhymes with its historical performance? The HUI should gain
between 60 and 120 % over the next 10 to 12 months. Using
an approximate buy point of 200, this implies HUI values sometime
in mid to late 2005 of between 320 and 440. Correspondingly,
the spot price of gold should reach values in the range of $500
to $600 per ounce - using the ìrule of 200î.
These latter prognostications
are difficult to believe for those entrenched in the daily machinations
of the gold market - even though many believe that the fundamentals
more than warrant such performance. Furthermore, the astute reader
will notice that the fundamental question has not been answered.
Will the 50 dma for the Spread again be a good indicator? Acknowledging
the nature of probability in studying the markets, we will leave
this question to be answered by time - the ultimate soothsayer.
All we can say at this point is, So far, So good.
October 3, 2004
Terry L. Krohn
PMtrader
Email: PMtrader
I extend a
special thank you to those who have supported my work by purchasing
my novel, Eye of the Pyramid. It is scheduled to ship
late next week.
For those others who are interested, don't miss out on the preorder
incentives, as they will be removed on the first shipping date.
Relevant links are: (or click on the image).
Axiom House:
http://www.axiomhouse.com/index.htm
Eye of the Pyramid:
http://www.axiomhouse.com/EyeofthePyramid/main.htm
or
http://www.eyeofthepyramid.com
Copyright ©
2004 by Author - Reproduced with Permission.
About
Terry L. Krohn
Mr. Krohn is a research scientist living in the Washington D.C.
area.
His field of expertise is scattering physics - the analysis of
interactions between electro-magnetic waves and matter.
321gold Inc
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