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Well $620 gave way 
Next support for me is at $540
Next support for me is at $540
Gold Price - Where is it heading?
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YOUNG_TRADER said:Well $620 gave way
Next support for me is at $540
That's just US$10 below Dr Dooms forecast, however, he sees gold recovering quickly after that.
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YOUNG_TRADER said:Well $620 gave way
Next support for me is at $540
It may test that support level again, but I think this well drift in a range for quite a while before putting in further lows.
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Thor said:
Been following the Gold market long enough to to suspect a set-up
POG going up in Asia is the usuall set-up for a sell off
Major problem @ the moment is that POG & HUI are following the DOW .
This is historically a deviation to the long term cycle
IMHO what was being discussed on KITCO recently --- Quote : the "hedge funds" are program trading only to be shot down by the COTs , is what seems to be going on ---- play their own game for the time being -- buy low -- sell high
When it hits around $US550--- then I'll be holding
@ the moment spot is $636 -- waiting for COTs to move in
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I got stopped out of my short position last night. I was thinking at the time that I had brought it in too tight at 638 (breakeven) where 646 would have been a more natural one. I think it still looks bearish and have reentered my short again.
MIT
MIT
Fair Valuation of Gold Price
Paul Van Eeden is expecting four digit gold prices.
http://radio.goldseek.com/shows/22.07.2006/07.22.06f.mp3
http://news.goldseek.com/PaulvanEeden/
Paul thinks that the currency crisis's of the 1990's are the primary driver for the domestic economic dilemma. Next, Paul explains how the Former M3 statistic can be easily calculated. In fact, he directs us to the Fed's website and provides a simple technique to estimate the current M3. Paul explains why the Fed. has its back against the wall. He insists they must either raise interest rates to encourage Asian bond purchases or monetize the debt - buying treasuries from the government to continue financing the domestic debt albatross. Paul tells the listeners how to calculate gold's true value.
Paul Van Eeden is expecting four digit gold prices.
http://radio.goldseek.com/shows/22.07.2006/07.22.06f.mp3
http://news.goldseek.com/PaulvanEeden/
Paul thinks that the currency crisis's of the 1990's are the primary driver for the domestic economic dilemma. Next, Paul explains how the Former M3 statistic can be easily calculated. In fact, he directs us to the Fed's website and provides a simple technique to estimate the current M3. Paul explains why the Fed. has its back against the wall. He insists they must either raise interest rates to encourage Asian bond purchases or monetize the debt - buying treasuries from the government to continue financing the domestic debt albatross. Paul tells the listeners how to calculate gold's true value.
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For the Techies, it has been an interesting candlestick pattern over the last few days for gold.
MIT
MIT
wayneL
VIVA LA LIBERTAD, CARAJO!
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Determinants of the Price of Gold
Determinants of the Price of Gold
In theory, short-run fluctuations in the gold price are expected to be caused by political and financial turmoil as well as changes in exchange rates, real interest rates and the beta for gold. We use cointegration techniques to analyse data from January 1976 to August 2005 to test the hypothesis that short-run movements in the gold price are indeed related to these factors, while the long-run price of gold moves with the general price level (consumer price index) to act as a hedge against inflation. The estimation model hypothesises that the price of gold is determined by general price levels in the US and internationally, US and world inflation, US and world inflation volatility, world income, the US-world exchange rate, the gold lease rate, alternative investment opportunities, credit risk and time-specific uncertainty caused by political and/or financial risk.
Three main findings emerge with respect to the analysis of the long-run determinants of the price of gold. First, there is a long-term relationship between the price of gold and the US price level. Second, the US price level and the price of gold move together in a statistically significant long-run relationship supporting the view that a one percent increase in the general US price level leads to a one percent increase in the price of gold. This evidence substantiates the belief that gold is a long-term hedge against inflation. Third, in the wake of a shock that causes a deviation from this long-term relationship, there is a slow reversion back towards it. The estimate of the error correction term is –0.019, which implies that each month’s error is about 2 per cent smaller than the previous month. In effect, this means that, in the aftermath of a shock, it typically takes around five years to eliminate two-thirds of the deviation from the long-term relationship between the price of gold and the US price level.
Short-run relationships between the following explanatory variables and changes in the gold price were found to be statistically significant. There was a positive relationship between gold price movements and changes in US inflation, US inflation volatility and credit risk. We found a negative relationship between changes in the gold price and changes in the US dollar trade-weighted exchange rate and the gold lease rate. The significant negative parameter on the “error correction mechanism” reflects the slow return of the gold price to its long-run relationship. These findings are in accordance with the theoretical framework put forward. However, on the basis of the empirical analysis, there was no significant relationship between changes in the price of gold and changes in world inflation, world inflation volatility, world income, and gold’s beta. These results are consistent with the widely held belief that there is a long-term one-for-one relationship between the price of gold and the general price level in the US. More specifically, a one per cent rise in US inflation raises the long-term price of gold by an estimated one per cent. A one percent increase in the long-term price of gold for a one percent rise in the general US price level lies within the 95 percent confidence interval. However, there are short-run deviations from the long-run relationship between the price of gold caused by short-run changes in the US inflation rate, inflation volatility, credit risk, the US dollar trade-weighted exchange rate and the gold lease rate. There is a slow reversion towards the long-term relationship following a shock that causes a deviation from this long-term relationship. It takes about five years for two-thirds of the long-term relationship between the price of gold and the general price level to be restored following any shock that causes a deviation in this long-term.
A major unresolved issue concerns gold as a long-run inflation hedge for countries other than the US. If the price of gold is quoted in US dollars and gold is an inflation hedge for the US, holding gold is profitable for investors domiciled in countries whose currencies depreciate against the US dollar more than required to compensate for the difference between the country’s and US inflation rate. It is surely no coincidence that the major gold consuming countries appear to be over-represented among countries that profited from holding gold because their currency depreciation against the US dollar exceeded that required to compensate for the inflation rate differences between the two countries. This relationship has not been rigorously examined in our analysis and a deeper investigation is warranted.
Figure 4 shows home country inflation hedge gold prices between 1976 and 2005 expressed in dollar prices for ten countries. This figure clearly shows that the major gold consuming countries outside of the USA, that is, India, China, Turkey, Saudi Arabia and Indonesia were rational to purchase gold. For these countries the actual US dollar gold price far exceeded the dollar gold price required to provide an inflation hedge after taking account of exchange rates between the US dollar and the home country and the home country consumer price index movements. If the price of gold is quoted in US dollars and gold is an inflation hedge for the USA, holding gold is profitable for investors domiciled in countries whose currencies depreciate against the US dollar by more than what is needed to compensate for the difference between the country’s and US inflation rate.
Whether investors in any particular country gain or lose by holding gold depends on the start date when gold is purchased and the length of the holding period. More specifically, it is far more likely to be profitable to invest in gold when the nominal price of gold is below its inflation hedge price. Conversely, it more likely to be unprofitable to invest in gold when the nominal gold price is above its inflation hedge price.
Finally, we turn to the policy implications of this analysis for potential investors in gold. One important implication concerns a likely US dollar depreciation required to restore balance to the US current account. There appears to be a consensus that US dollar depreciation is inevitable – the only issue being when it will occur and whether the adjustment path will be smooth or disorderly. Jarrett (2005) lists fourteen estimates of the dollar depreciation that would be needed to restore the imbalance in the US current account deficit. These estimates range between 12 per cent and 90 per cent. If gold is a long-run hedge against inflation, and if it is true that real dollar depreciation against other currencies is inevitable, US wealth holders should profit from holding gold during this period for two reasons.
The first reason is that the dollar depreciation will lower the price of gold to investors outside of the USA, and this will raise their demand for gold and raise the US dollar price of gold. That is in addition to the long-run relationship between the US price level and the price of gold. The second reason is that dollar depreciation will likely raise US inflation rates, and gold would act as an inflation hedge during this period.
Determinants of the Price of Gold
In theory, short-run fluctuations in the gold price are expected to be caused by political and financial turmoil as well as changes in exchange rates, real interest rates and the beta for gold. We use cointegration techniques to analyse data from January 1976 to August 2005 to test the hypothesis that short-run movements in the gold price are indeed related to these factors, while the long-run price of gold moves with the general price level (consumer price index) to act as a hedge against inflation. The estimation model hypothesises that the price of gold is determined by general price levels in the US and internationally, US and world inflation, US and world inflation volatility, world income, the US-world exchange rate, the gold lease rate, alternative investment opportunities, credit risk and time-specific uncertainty caused by political and/or financial risk.
Three main findings emerge with respect to the analysis of the long-run determinants of the price of gold. First, there is a long-term relationship between the price of gold and the US price level. Second, the US price level and the price of gold move together in a statistically significant long-run relationship supporting the view that a one percent increase in the general US price level leads to a one percent increase in the price of gold. This evidence substantiates the belief that gold is a long-term hedge against inflation. Third, in the wake of a shock that causes a deviation from this long-term relationship, there is a slow reversion back towards it. The estimate of the error correction term is –0.019, which implies that each month’s error is about 2 per cent smaller than the previous month. In effect, this means that, in the aftermath of a shock, it typically takes around five years to eliminate two-thirds of the deviation from the long-term relationship between the price of gold and the US price level.
Short-run relationships between the following explanatory variables and changes in the gold price were found to be statistically significant. There was a positive relationship between gold price movements and changes in US inflation, US inflation volatility and credit risk. We found a negative relationship between changes in the gold price and changes in the US dollar trade-weighted exchange rate and the gold lease rate. The significant negative parameter on the “error correction mechanism” reflects the slow return of the gold price to its long-run relationship. These findings are in accordance with the theoretical framework put forward. However, on the basis of the empirical analysis, there was no significant relationship between changes in the price of gold and changes in world inflation, world inflation volatility, world income, and gold’s beta. These results are consistent with the widely held belief that there is a long-term one-for-one relationship between the price of gold and the general price level in the US. More specifically, a one per cent rise in US inflation raises the long-term price of gold by an estimated one per cent. A one percent increase in the long-term price of gold for a one percent rise in the general US price level lies within the 95 percent confidence interval. However, there are short-run deviations from the long-run relationship between the price of gold caused by short-run changes in the US inflation rate, inflation volatility, credit risk, the US dollar trade-weighted exchange rate and the gold lease rate. There is a slow reversion towards the long-term relationship following a shock that causes a deviation from this long-term relationship. It takes about five years for two-thirds of the long-term relationship between the price of gold and the general price level to be restored following any shock that causes a deviation in this long-term.
A major unresolved issue concerns gold as a long-run inflation hedge for countries other than the US. If the price of gold is quoted in US dollars and gold is an inflation hedge for the US, holding gold is profitable for investors domiciled in countries whose currencies depreciate against the US dollar more than required to compensate for the difference between the country’s and US inflation rate. It is surely no coincidence that the major gold consuming countries appear to be over-represented among countries that profited from holding gold because their currency depreciation against the US dollar exceeded that required to compensate for the inflation rate differences between the two countries. This relationship has not been rigorously examined in our analysis and a deeper investigation is warranted.
Figure 4 shows home country inflation hedge gold prices between 1976 and 2005 expressed in dollar prices for ten countries. This figure clearly shows that the major gold consuming countries outside of the USA, that is, India, China, Turkey, Saudi Arabia and Indonesia were rational to purchase gold. For these countries the actual US dollar gold price far exceeded the dollar gold price required to provide an inflation hedge after taking account of exchange rates between the US dollar and the home country and the home country consumer price index movements. If the price of gold is quoted in US dollars and gold is an inflation hedge for the USA, holding gold is profitable for investors domiciled in countries whose currencies depreciate against the US dollar by more than what is needed to compensate for the difference between the country’s and US inflation rate.
Whether investors in any particular country gain or lose by holding gold depends on the start date when gold is purchased and the length of the holding period. More specifically, it is far more likely to be profitable to invest in gold when the nominal price of gold is below its inflation hedge price. Conversely, it more likely to be unprofitable to invest in gold when the nominal gold price is above its inflation hedge price.
Finally, we turn to the policy implications of this analysis for potential investors in gold. One important implication concerns a likely US dollar depreciation required to restore balance to the US current account. There appears to be a consensus that US dollar depreciation is inevitable – the only issue being when it will occur and whether the adjustment path will be smooth or disorderly. Jarrett (2005) lists fourteen estimates of the dollar depreciation that would be needed to restore the imbalance in the US current account deficit. These estimates range between 12 per cent and 90 per cent. If gold is a long-run hedge against inflation, and if it is true that real dollar depreciation against other currencies is inevitable, US wealth holders should profit from holding gold during this period for two reasons.
The first reason is that the dollar depreciation will lower the price of gold to investors outside of the USA, and this will raise their demand for gold and raise the US dollar price of gold. That is in addition to the long-run relationship between the US price level and the price of gold. The second reason is that dollar depreciation will likely raise US inflation rates, and gold would act as an inflation hedge during this period.
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wayneL said:
Thanks I didn't have my candlesticks book available. With CMC it looks a little more dramatic probably due to the shift in the day start/finish. Last night the last bar was showing a third red rejection of the lower price. I should have listened as I got stopped out of my short.
The Wave people have been quiet on gold lately? Anybody venture an opinion?
MIT
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mit said:
Hi Mit,
Nothing has changed in my opinion. Sticking to the same roadmap outlined in long term chart in post #639. Basically net sideways consolidation for quite a while to come. I am also short ($662) from over a week ago. May get stopped this evening if it does not play out to plan. Otherwise the plan is to exit at $560-580 if it happens. Technically not worth looking at this one for quite a whiles thereafter. same story as our local market!!
Cheers
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wavepicker said:
Thanks Wavepicker,
I thought the last movement might have invalidated the chart, Well I'm out until it does something definite. Hopfully 662 will hold for you and you get your profit at 560. The last few gold moves have been textbook TA and I have profited from them, so I'm happy.
MIT
Sean K
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Cautiously bullish
2336 GMT [Dow Jones] Spot gold at $651.55/oz, giving up $1 of modest overnight gains made in fairly thin conditions on recent USD weakness, ongoing Mideast tensions, favorable chart patterns after break above $650. However, ScotiaMocatta notes retracement from high of $657 "smells of a false breakout." Nevertheless, recommends cautiously bullish approach, with likely attempt at $668; underlying support at $645 down to $637.50. USD reaction to upcoming U.S. data likely to provide cues for gold coming sessions. (JAD)
2336 GMT [Dow Jones] Spot gold at $651.55/oz, giving up $1 of modest overnight gains made in fairly thin conditions on recent USD weakness, ongoing Mideast tensions, favorable chart patterns after break above $650. However, ScotiaMocatta notes retracement from high of $657 "smells of a false breakout." Nevertheless, recommends cautiously bullish approach, with likely attempt at $668; underlying support at $645 down to $637.50. USD reaction to upcoming U.S. data likely to provide cues for gold coming sessions. (JAD)
I know you're not asking me, but if you were to ask me, I would say Gold is looking very bullish. I am hearing this word inflation, over and over again, which is something that puts pressure on Gold going up.
But right now I'm looking at a weekly future chart GCQ6 and it looks very bullish, I would consider that if it is going to be bullish from now it would be confirmed by going through around the 664.5 mark, but for you bears I wouldn't be going short unless it went below 600, and fundermentally I can't see that happening.
For me I'm cheering on Gold to go up, and going to new highs. If you are following Oil it looks like it has be building support, and will go higher, and the US$ isn't looking that strong. This is all in favour of the rising price of Gold.
Only my opinion, I could be totally wrong.
But right now I'm looking at a weekly future chart GCQ6 and it looks very bullish, I would consider that if it is going to be bullish from now it would be confirmed by going through around the 664.5 mark, but for you bears I wouldn't be going short unless it went below 600, and fundermentally I can't see that happening.
For me I'm cheering on Gold to go up, and going to new highs. If you are following Oil it looks like it has be building support, and will go higher, and the US$ isn't looking that strong. This is all in favour of the rising price of Gold.
Only my opinion, I could be totally wrong.
Historically gold always rallies harder in the 2nd half of the year
This year IMO will be no different
Gold rose last year by about 23% even though the USD rose by 14%... drawing investors with its consecutive monthly rate rises
I believe that 2nite's employment report for july will show no jobless grew faster than expected ie. slowing economy, and this will be the last piece of info the FED need to pause in August
Now, since a fundamentally weak USD will no longer be supported by rate rises as the FED is near or at the end of the tightening cycle, this should be the catalyst required for the USD to fall and to spark gold's rally taking it to maybe 800-850 by years end
I would not be suprised if gold rallied 2nite (over the weeknd) but $20 or so and the goldies to gap up higher on monday open
Of course the above is only my opinion
This year IMO will be no different
Gold rose last year by about 23% even though the USD rose by 14%... drawing investors with its consecutive monthly rate rises
I believe that 2nite's employment report for july will show no jobless grew faster than expected ie. slowing economy, and this will be the last piece of info the FED need to pause in August
Now, since a fundamentally weak USD will no longer be supported by rate rises as the FED is near or at the end of the tightening cycle, this should be the catalyst required for the USD to fall and to spark gold's rally taking it to maybe 800-850 by years end
I would not be suprised if gold rallied 2nite (over the weeknd) but $20 or so and the goldies to gap up higher on monday open
Of course the above is only my opinion
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Tony, try attaching the chart to your post, rather than linking to it from your blog as it doesn't show up that way.
See this thread for more info: https://www.aussiestockforums.com/forums/showthread.php?t=2522
See this thread for more info: https://www.aussiestockforums.com/forums/showthread.php?t=2522
HUI and Gold (Part 1)
http://www.321gold.com/editorials/tan/tan080806.html
Thomas Z. Tan
Aug 8, 2006
I have been reading many articles on the topics of gold and gold miners for a few years now. Here I would like to share my view on both gold and especially HUI, many of which are results of my own research and haven't been read from other publications. The main point of this article is if we view HUI as a derivative of gold, it will give a better understanding of HUI movement, resulting better indication and wave count than gold itself for the purpose of future projection. My forecast on gold is also discussed here.
Part One - HUI
HUI is composed of 15 large and mid size gold mining companies (with equal dollar weighting) which do not hedge beyond 1.5 years. Due to this unhedged or light hedged nature, I look at HUI more as a very long term call option of gold. As everyone knows, the best movement of HUI is from the bottom of $38 at the end of 2000 to $155 in 2002, 400% return in 1.5 year. However, gold itself has gone only from $250 to $325 in the same period, or about 30% return. In other words, return on HUI is over 10 times higher than gold for this period which I would call phase I, the best so far. However from 2002 to now for 4 long years, HUI is up only from $155 to $320, or 100% return, in par with gold from $325 to $650, also 100%. Does anyone ever ask why there is such large disparity in behavior and return between the two periods?
Even gold mining companies vary differently in their costs of excavating gold from ground, the average on the HUI miners is believed to be around $325 including overhead. If you look HUI as a very long term call option of gold option (expires only when miners are in bankruptcy), it makes perfect sense why HUI return was over 10 times higher than gold in phase I. When gold reached the bottom of $250, HUI was way out of money. Option traders know they don't worth a lot. HUI during 2000 at $38 behaved like 100 calls ($0.38 per call) with strike price at $325 when gold traded at $250, $75 out of money. Then gold slowly rose to $325 in the next 1.5 years and finally put HUI at the money (at its strike price), what would you think HUI should be traded at? I think $155 per 100 calls ($1.55 per call) would be a very reasonable market price due to the time and volatility values from the Black Scholes model. This is phase I.
Now for phase II, when gold price keeps creeping up, HUI again as a call option of gold, becomes more and more in the money, the ratio of change in HUI vs. gold is approaching one, the so-called delta hedging of a call option. That is exactly what has happened last 4 years when HUI has moved from $155 to $320, or 100% return, "magically" matching gold from $325 to $650, also 100%.
The behavior of HUI last 6 years has proved exactly that HUI is a derivative of gold, at least from a long term view. This is not a coincidence and makes perfect fundamental sense. Stock option traders know that option leads stocks, so is HUI as a leading indicator of gold.
If we accept this view, the implications are: 1) We should never view HUI independently, have to be in conjunction with gold at all time; 2) Any technical analysis (TA) on HUI alone such as Elliot Wave Projection (EWP) would only make sense if the same analysis on gold is correct; 3) The deviation of HUI from gold is a important TA indication due to its leading and lagging natures.
I have read several editorials from TA standpoint that HUI will go to stratosphere by repeating the 1st phase rise from $38 to $250 in the near term. The fractal TA target is based on extrapolating the same length of movement as the previous one on a log scale. In other words, they expect the current % gain will repeat the $38-$250 run in about the same length of time. I think they will be disappointed. It is obviously incorrect to expect return of in the money calls to match out of money calls. HUI might go to stratosphere only if gold goes to stratosphere in the near future. Anything is possible in the market, but not likely (see my discussion on "Part II - Gold" below).
HUI has deviated short term from gold from time to time. The longest deviation happened and lasted for the whole year of 2004. Gold was able to creep up to a higher high but HUI couldn't and lagged behind. I think this is due to the lack of arbitrage mechanism between HUI and gold. For option arbitrage, we have something called put call parity, or c-p = S-X. For example, if call is undervalued, we can buy call, short put, short stock, buy US treasury to generate a risk free arbitrage profit. However, it is not true for HUI, since there is not a good basket of companies or index which is closely but inversely correlated to gold.
Why is the deviation in 2004 then? I think the main reason is people's expectation and perspective view on gold. At 2004, even gold rose slowly and made hew high, no one believed that gold would stay at the level of $400-$450 very long, the general public view was that gold would eventually go back down to $300-$350 level (again close to the strike price). HUI as a composition of gold miners, correctly reflected the mass view at that time by discounting the future earnings, and traded at "discount" to gold. This however won't happen in stock option due to arbitrage discussed above. It explains the following chart why HUI vs. gold ratio dropped from 0.6 to 0.4 during that period, a 33% reduction. Will this happen today? I don't think so. The public consensus has accepted gold price in the range between $550-$650, not far from current level, much more positive sentiment than in 2004.
Will HUI ever trade in "premium" to gold in the future? My view is unlikely, the reasons are: 1) Companies have too many risks such as geopolitical (foreign government, manpower, unions, environment, health & safety, regulation), reserve uncertainty, capacity limitation, management, operating issues, capital & refinancing, especially costs (as we see HUI is currently depressed by the high energy costs). 2) Reserves will eventually run out and finding and securing new reserve is always the biggest risk. If we believe that the World is running out of gold mines, this risk is huge. 3) Even if people expect gold trading at stratosphere level, unhedged gold miners can only excavate gold so much and so fast each year up to the longevity of reserves, reflecting profit or earnings based on an average gold price substantial less than the peak price. Even reserve estimate might increase with higher gold price due to low grade ore becoming profitable, but no matter what the peak gold eventually reaches, HUI will reflect a much lower average gold price due to operational constraints.
I expect in the future which I call phase III, the delta between HUI and gold will drop gradually from current 1:1 down to somewhere 0.75:1 or lower (see my chart on HUI vs. gold future correlation below). For example, when gold reaches $2000 (500% return from $325 gold level), I only expect HUI to get to $750 (400% return from $150 HUI level). The main reason is simply because the risk associated with owning gold is much less than all the risk associated with owning some mining companies as discussed above. I strongly believe that gold offers a better risk/reward profile than HUI, and is a better investment vehicle than HUI in the future.
However I am only talking about the large and mid tier gold miners in HUI. For small miners, exploration and early discovery companies, I view them as events driven similar to biotech firms finding drugs. If jackpot is hit by finding a new gold mine with good quality and large reserves, the return can be unimaginable, whether gold trades $1000 or $2000 makes little difference.
When HUI is more in the money, market will evaluate gold miners less by earnings or P/E ratios, more by the values of their reserves minus excavation costs. Analysts will use models to discount future profits from the existing reserves and will probably assign very little value of their ability to hit future jackpot due to the scarcity and low probability of finding new gold mines. I think the best return in the future is in the companies with the highest and good quality reserves. Barrick Gold's current offer to NovaGold proves this. Barrick Gold is in XAU not HUI due to its heavy hedging on gold, it makes perfect sense for a XAU hedged miner to acquire an unhedged one, increasing reserves at the same time reducing hedge.
http://www.321gold.com/editorials/tan/tan080806.html
Thomas Z. Tan
Aug 8, 2006
I have been reading many articles on the topics of gold and gold miners for a few years now. Here I would like to share my view on both gold and especially HUI, many of which are results of my own research and haven't been read from other publications. The main point of this article is if we view HUI as a derivative of gold, it will give a better understanding of HUI movement, resulting better indication and wave count than gold itself for the purpose of future projection. My forecast on gold is also discussed here.
Part One - HUI
HUI is composed of 15 large and mid size gold mining companies (with equal dollar weighting) which do not hedge beyond 1.5 years. Due to this unhedged or light hedged nature, I look at HUI more as a very long term call option of gold. As everyone knows, the best movement of HUI is from the bottom of $38 at the end of 2000 to $155 in 2002, 400% return in 1.5 year. However, gold itself has gone only from $250 to $325 in the same period, or about 30% return. In other words, return on HUI is over 10 times higher than gold for this period which I would call phase I, the best so far. However from 2002 to now for 4 long years, HUI is up only from $155 to $320, or 100% return, in par with gold from $325 to $650, also 100%. Does anyone ever ask why there is such large disparity in behavior and return between the two periods?
Even gold mining companies vary differently in their costs of excavating gold from ground, the average on the HUI miners is believed to be around $325 including overhead. If you look HUI as a very long term call option of gold option (expires only when miners are in bankruptcy), it makes perfect sense why HUI return was over 10 times higher than gold in phase I. When gold reached the bottom of $250, HUI was way out of money. Option traders know they don't worth a lot. HUI during 2000 at $38 behaved like 100 calls ($0.38 per call) with strike price at $325 when gold traded at $250, $75 out of money. Then gold slowly rose to $325 in the next 1.5 years and finally put HUI at the money (at its strike price), what would you think HUI should be traded at? I think $155 per 100 calls ($1.55 per call) would be a very reasonable market price due to the time and volatility values from the Black Scholes model. This is phase I.
Now for phase II, when gold price keeps creeping up, HUI again as a call option of gold, becomes more and more in the money, the ratio of change in HUI vs. gold is approaching one, the so-called delta hedging of a call option. That is exactly what has happened last 4 years when HUI has moved from $155 to $320, or 100% return, "magically" matching gold from $325 to $650, also 100%.
The behavior of HUI last 6 years has proved exactly that HUI is a derivative of gold, at least from a long term view. This is not a coincidence and makes perfect fundamental sense. Stock option traders know that option leads stocks, so is HUI as a leading indicator of gold.
If we accept this view, the implications are: 1) We should never view HUI independently, have to be in conjunction with gold at all time; 2) Any technical analysis (TA) on HUI alone such as Elliot Wave Projection (EWP) would only make sense if the same analysis on gold is correct; 3) The deviation of HUI from gold is a important TA indication due to its leading and lagging natures.
I have read several editorials from TA standpoint that HUI will go to stratosphere by repeating the 1st phase rise from $38 to $250 in the near term. The fractal TA target is based on extrapolating the same length of movement as the previous one on a log scale. In other words, they expect the current % gain will repeat the $38-$250 run in about the same length of time. I think they will be disappointed. It is obviously incorrect to expect return of in the money calls to match out of money calls. HUI might go to stratosphere only if gold goes to stratosphere in the near future. Anything is possible in the market, but not likely (see my discussion on "Part II - Gold" below).
HUI has deviated short term from gold from time to time. The longest deviation happened and lasted for the whole year of 2004. Gold was able to creep up to a higher high but HUI couldn't and lagged behind. I think this is due to the lack of arbitrage mechanism between HUI and gold. For option arbitrage, we have something called put call parity, or c-p = S-X. For example, if call is undervalued, we can buy call, short put, short stock, buy US treasury to generate a risk free arbitrage profit. However, it is not true for HUI, since there is not a good basket of companies or index which is closely but inversely correlated to gold.
Why is the deviation in 2004 then? I think the main reason is people's expectation and perspective view on gold. At 2004, even gold rose slowly and made hew high, no one believed that gold would stay at the level of $400-$450 very long, the general public view was that gold would eventually go back down to $300-$350 level (again close to the strike price). HUI as a composition of gold miners, correctly reflected the mass view at that time by discounting the future earnings, and traded at "discount" to gold. This however won't happen in stock option due to arbitrage discussed above. It explains the following chart why HUI vs. gold ratio dropped from 0.6 to 0.4 during that period, a 33% reduction. Will this happen today? I don't think so. The public consensus has accepted gold price in the range between $550-$650, not far from current level, much more positive sentiment than in 2004.
Will HUI ever trade in "premium" to gold in the future? My view is unlikely, the reasons are: 1) Companies have too many risks such as geopolitical (foreign government, manpower, unions, environment, health & safety, regulation), reserve uncertainty, capacity limitation, management, operating issues, capital & refinancing, especially costs (as we see HUI is currently depressed by the high energy costs). 2) Reserves will eventually run out and finding and securing new reserve is always the biggest risk. If we believe that the World is running out of gold mines, this risk is huge. 3) Even if people expect gold trading at stratosphere level, unhedged gold miners can only excavate gold so much and so fast each year up to the longevity of reserves, reflecting profit or earnings based on an average gold price substantial less than the peak price. Even reserve estimate might increase with higher gold price due to low grade ore becoming profitable, but no matter what the peak gold eventually reaches, HUI will reflect a much lower average gold price due to operational constraints.
I expect in the future which I call phase III, the delta between HUI and gold will drop gradually from current 1:1 down to somewhere 0.75:1 or lower (see my chart on HUI vs. gold future correlation below). For example, when gold reaches $2000 (500% return from $325 gold level), I only expect HUI to get to $750 (400% return from $150 HUI level). The main reason is simply because the risk associated with owning gold is much less than all the risk associated with owning some mining companies as discussed above. I strongly believe that gold offers a better risk/reward profile than HUI, and is a better investment vehicle than HUI in the future.
However I am only talking about the large and mid tier gold miners in HUI. For small miners, exploration and early discovery companies, I view them as events driven similar to biotech firms finding drugs. If jackpot is hit by finding a new gold mine with good quality and large reserves, the return can be unimaginable, whether gold trades $1000 or $2000 makes little difference.
When HUI is more in the money, market will evaluate gold miners less by earnings or P/E ratios, more by the values of their reserves minus excavation costs. Analysts will use models to discount future profits from the existing reserves and will probably assign very little value of their ability to hit future jackpot due to the scarcity and low probability of finding new gold mines. I think the best return in the future is in the companies with the highest and good quality reserves. Barrick Gold's current offer to NovaGold proves this. Barrick Gold is in XAU not HUI due to its heavy hedging on gold, it makes perfect sense for a XAU hedged miner to acquire an unhedged one, increasing reserves at the same time reducing hedge.
HUI and Gold (Part 2)
Part Two - Gold
Since HUI basically moves with gold, I want to discuss here my view on gold's long term target and its EWP. There is no lack of such views from many resource websites, and I have learned so much from various authors, I will repeat some of them here but also give what I believe.
Long Term Gold Target
I expect gold peaks at $4000-$5000 at the end of this bull market. I agree with many people that the best way to forecast peak is by comparing gold vs. other major indexes:
Gold vs. DJIA. With a secular bear stock market, DJIA should drop to $5000, a 50% reduction, the DJIA/Gold ratio could reach 1:1 at the bottom from current 18:1, thus gold at $5000.
Gold vs. CPI. If we use the pre-modified CPI formula prior to mid 1990s, economists have calculated the current inflation should be around 7-8%, double the 3-4% claimed by the government. Compounding for last 26 years, coupled with likely future higher inflation, gold should reach $3000-$4000 range to be comparable to $887.5 of 1980 dollar.
Gold ties more to money supply than any other factors. There is a reason why government stopped publishing M3, probably not to save $1M cost for compiling the data, but because M3 has been running out of control, rising exponentially. Economists have come up with $4000-$5000 gold in order to tie back to M3 in 1970s. Due to the lack of transparency on M3, people would think M3 is even worse than it really is (even the real data is already bad enough). There will be a time public view greenback worthless as in the period of late 1970s to early 1980s.
Gold vs. Oil. At the peak, Gold vs. Oil ratio might reach 30 (not a historical all time high), putting gold to $4000 with oil at $133 or $5000 with oil at $170.
Gold now vs. 1970s. Gold was up from $35 to $887.5 in 1970s, 2500% return. Using the same ratio from $250 bottom low, gold could reach over $6000.
At the same time, I have reservation on gold peak much higher than $5000 at this gold bull market. I have seen some authors projecting a gold price at $10,000 and/or higher with 5 digits. Even anything is possible in the market, but I seriously doubt 5 digits will happen in this bull market, mainly due to the ratio analysis above. Maybe it will happen in the next gold bull if someone can wait for another 40 years.
However I also believe gold will take us much higher than just the current CPI adjusted $2000 level, equivalent to $887.5 of 1980 dollar. The main fundamental reason is globalization, which brings much higher demand for gold across the globe than 1970s with more severe scarcity of gold supplies. Globalization is a double edge sword. It brings economic growth and trades but also instability for all countries alike. It exports western consumption and lifestyle to the whole World population, causing natural resource consumption increasing exponentially as well as prices for all commodities. It brings competitions to devalue paper currencies of all countries alike to gain trade advantage. If greenback as the dominant and strongest currency in the World, collapses in the future, all paper currencies will collapse together, resulting gold as the last currency standing and the only universal currency everyone can trust. Central banks (CBs) will have to compete to increase their gold reserves, developed and developing countries alike. CBs in developed countries have been net gold sellers, while CBs in all developing countries have very little gold in their reserves.
It is a pity that CBs such as Bank of England sold large shares of gold reserves at the absolute bottom of $250-$300 in 2000. From cycle standpoint, gold should have bottomed in 1999 or earlier. The early 2001 bottom according to GATA is more a manipulation and collusion of CBs than real demand and supply driven. But this kind of manipulation if true, plus discontinued M3 and new CPI "adjustments" will backfire in the future, just as $250 was an anomaly of gold at the low side, public dissatisfaction, anxiety and insecurity will cause anomaly at the other side, bringing gold to a much higher level than CPI adjusted. When Greenspan was asked by a congressman how stupid Bank of England was to sell gold at the absolute bottom, worst timing ever possible, he strongly defended them by saying "The British knew what they were doing". This led people to believe that Fed might actually involve too, maybe by lending gold or even selling at the same time, act of collusion as GATA has always suspected. No matter what happened then, three things are true: 1) Rise of gold is a nightmare for all CBs; 2) All CBs have less gold than they claim having, and will gradually have less ammunition to depress gold and eventually defenseless to protect their paper currencies; 3) At the end all CBs will have to turn into net gold buyers from sellers.
EWP of Gold
This is purely based on my view on EWP. Different people have different opinions on EWP. I will give mine and I also think using EWP long term makes more sense than short term, especially in conjunction with HUI. The key here is to define where major wave II was for this gold bull after wave I started in 2001. Many people think we are currently at wave II due to the sharp drop in gold from $730-$550. I tend to disagree. If you look at HUI instead of gold from 2000, the major wave I was obvious from end of 2000 to end of 2003, lasting 3 years, while wave II was during end of 2003 to mid 2005, lasting 1.5 years (half of the time of wave I). This makes sense for EWP, all other drops are not long enough to qualify as wave II. During the same 1.5 years, gold did creep up slowly, forming a diamond shape wave II, unusual but possible and bullish for wave III. As I indicated before, EWP of HUI is more logic and accurate than gold EWP, due to both its derivative nature of gold and its ability to deviate to better reflect the real psychological level of public expectation and perspective on gold.
If my view is correct on wave II, we are currently at wave III. With wave I lasted about 3 years, wave II half of that, it is reasonable to expect wave III to last at least 2-3 years. Today wave III is only 1 year, should have at least another 1 or likely 2 more years to go until 2008, bringing us to $1800-$2000, 400% return from wave II bottom. The current sharp drop from $730 to $550 is a necessary correction within wave III, although from the COT report, the last $50 drop from $600 to $550 was more due to manipulation by large commercials to shake the weak apples. Gold will recover sooner than expected. After wave III, I expect a serious correction of wave IV, lasting for 2 years similar to 1974-1976, bringing us down to about $1200 (50% correction) before a run away to my final $4000-$5000 target, another 400% gain.
If gold reaches this level as forecast, by using the same ratio of peak of $887.5 at 1980 to $250 at 2001, I project gold will bottom at $1100-$1400 as the absolute bottom at the next major gold bear market which again can last for 20 years or so. If it happens as expected, gold will still remain at 4 digits for this and next generation and probably forever as far as gold remains as the universal and last currency for the whole World. I believe once gold securely and convincingly overcomes the $1000 mark, and current wave III reaches $1800 to $2000 range, gold will never go back down below $1000, thus never be 3 digits again. When will be the best time to buy gold? Answer: If not now, when?
Thomas Z. Tan, CFA, MBA
thomast2@optonline.net
Part Two - Gold
Since HUI basically moves with gold, I want to discuss here my view on gold's long term target and its EWP. There is no lack of such views from many resource websites, and I have learned so much from various authors, I will repeat some of them here but also give what I believe.
Long Term Gold Target
I expect gold peaks at $4000-$5000 at the end of this bull market. I agree with many people that the best way to forecast peak is by comparing gold vs. other major indexes:
Gold vs. DJIA. With a secular bear stock market, DJIA should drop to $5000, a 50% reduction, the DJIA/Gold ratio could reach 1:1 at the bottom from current 18:1, thus gold at $5000.
Gold vs. CPI. If we use the pre-modified CPI formula prior to mid 1990s, economists have calculated the current inflation should be around 7-8%, double the 3-4% claimed by the government. Compounding for last 26 years, coupled with likely future higher inflation, gold should reach $3000-$4000 range to be comparable to $887.5 of 1980 dollar.
Gold ties more to money supply than any other factors. There is a reason why government stopped publishing M3, probably not to save $1M cost for compiling the data, but because M3 has been running out of control, rising exponentially. Economists have come up with $4000-$5000 gold in order to tie back to M3 in 1970s. Due to the lack of transparency on M3, people would think M3 is even worse than it really is (even the real data is already bad enough). There will be a time public view greenback worthless as in the period of late 1970s to early 1980s.
Gold vs. Oil. At the peak, Gold vs. Oil ratio might reach 30 (not a historical all time high), putting gold to $4000 with oil at $133 or $5000 with oil at $170.
Gold now vs. 1970s. Gold was up from $35 to $887.5 in 1970s, 2500% return. Using the same ratio from $250 bottom low, gold could reach over $6000.
At the same time, I have reservation on gold peak much higher than $5000 at this gold bull market. I have seen some authors projecting a gold price at $10,000 and/or higher with 5 digits. Even anything is possible in the market, but I seriously doubt 5 digits will happen in this bull market, mainly due to the ratio analysis above. Maybe it will happen in the next gold bull if someone can wait for another 40 years.
However I also believe gold will take us much higher than just the current CPI adjusted $2000 level, equivalent to $887.5 of 1980 dollar. The main fundamental reason is globalization, which brings much higher demand for gold across the globe than 1970s with more severe scarcity of gold supplies. Globalization is a double edge sword. It brings economic growth and trades but also instability for all countries alike. It exports western consumption and lifestyle to the whole World population, causing natural resource consumption increasing exponentially as well as prices for all commodities. It brings competitions to devalue paper currencies of all countries alike to gain trade advantage. If greenback as the dominant and strongest currency in the World, collapses in the future, all paper currencies will collapse together, resulting gold as the last currency standing and the only universal currency everyone can trust. Central banks (CBs) will have to compete to increase their gold reserves, developed and developing countries alike. CBs in developed countries have been net gold sellers, while CBs in all developing countries have very little gold in their reserves.
It is a pity that CBs such as Bank of England sold large shares of gold reserves at the absolute bottom of $250-$300 in 2000. From cycle standpoint, gold should have bottomed in 1999 or earlier. The early 2001 bottom according to GATA is more a manipulation and collusion of CBs than real demand and supply driven. But this kind of manipulation if true, plus discontinued M3 and new CPI "adjustments" will backfire in the future, just as $250 was an anomaly of gold at the low side, public dissatisfaction, anxiety and insecurity will cause anomaly at the other side, bringing gold to a much higher level than CPI adjusted. When Greenspan was asked by a congressman how stupid Bank of England was to sell gold at the absolute bottom, worst timing ever possible, he strongly defended them by saying "The British knew what they were doing". This led people to believe that Fed might actually involve too, maybe by lending gold or even selling at the same time, act of collusion as GATA has always suspected. No matter what happened then, three things are true: 1) Rise of gold is a nightmare for all CBs; 2) All CBs have less gold than they claim having, and will gradually have less ammunition to depress gold and eventually defenseless to protect their paper currencies; 3) At the end all CBs will have to turn into net gold buyers from sellers.
EWP of Gold
This is purely based on my view on EWP. Different people have different opinions on EWP. I will give mine and I also think using EWP long term makes more sense than short term, especially in conjunction with HUI. The key here is to define where major wave II was for this gold bull after wave I started in 2001. Many people think we are currently at wave II due to the sharp drop in gold from $730-$550. I tend to disagree. If you look at HUI instead of gold from 2000, the major wave I was obvious from end of 2000 to end of 2003, lasting 3 years, while wave II was during end of 2003 to mid 2005, lasting 1.5 years (half of the time of wave I). This makes sense for EWP, all other drops are not long enough to qualify as wave II. During the same 1.5 years, gold did creep up slowly, forming a diamond shape wave II, unusual but possible and bullish for wave III. As I indicated before, EWP of HUI is more logic and accurate than gold EWP, due to both its derivative nature of gold and its ability to deviate to better reflect the real psychological level of public expectation and perspective on gold.
If my view is correct on wave II, we are currently at wave III. With wave I lasted about 3 years, wave II half of that, it is reasonable to expect wave III to last at least 2-3 years. Today wave III is only 1 year, should have at least another 1 or likely 2 more years to go until 2008, bringing us to $1800-$2000, 400% return from wave II bottom. The current sharp drop from $730 to $550 is a necessary correction within wave III, although from the COT report, the last $50 drop from $600 to $550 was more due to manipulation by large commercials to shake the weak apples. Gold will recover sooner than expected. After wave III, I expect a serious correction of wave IV, lasting for 2 years similar to 1974-1976, bringing us down to about $1200 (50% correction) before a run away to my final $4000-$5000 target, another 400% gain.
If gold reaches this level as forecast, by using the same ratio of peak of $887.5 at 1980 to $250 at 2001, I project gold will bottom at $1100-$1400 as the absolute bottom at the next major gold bear market which again can last for 20 years or so. If it happens as expected, gold will still remain at 4 digits for this and next generation and probably forever as far as gold remains as the universal and last currency for the whole World. I believe once gold securely and convincingly overcomes the $1000 mark, and current wave III reaches $1800 to $2000 range, gold will never go back down below $1000, thus never be 3 digits again. When will be the best time to buy gold? Answer: If not now, when?
Thomas Z. Tan, CFA, MBA
thomast2@optonline.net
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