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« Agnico-Eagle Mines Limited: A Class Act! | Main | Portfolio Update 21 August 2007 »

Gold Stocks: Oversold?

There are many indicators that we can use to guide us through this minefield of a market. Today we are examining just one of them and that is the HUI to GOLD Ratio.

We will kick off with a look at the chart:

The HUI and Gold Ratio 22 aug 07

The first thing to pop up is that the indicator is reading 0.47 which reflects the HUI at around 320 and Gold at around $660/oz. We have drawn an orange line back through time to see just how far back we have to go to detect another occurrence of this ratio and we land up in the summer of 2005. At that time the HUI was around 190 and gold was around $425/oz giving us a ratio of 0.45 or thereabouts. Since then the ratio has been consistently higher reaching highs of 0.62.

So if the ratio were to return to the half way point between 0.47 and say 0.60 then the new ratio would be 0.53. If we assume that gold remains at $660/oz then the HUI would be 349 (0.53 X 660) for an increase of 9% in the value of the stocks.

If the ratio returns to 0.60 then the HUI would be 396 (0.60 X 660) for an increase of 23% in the value of the stocks.

Should the gap close between the HUI and Gold at the same time as the price of gold rises then the price of gold stocks would be catapulted much higher than they are today. And when the eventual blow off comes, who knows!

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Reader Comments (3)

I am curious. If the dropping US dollar is bullish for US gold futures, what happens if the dollar really craters, US gold futures become cheaper because the US dollar is cheaper for everyone, and yen an euro climb but does London gold drop, or do people buy US gold to protect or hedge US stock values. Am I on the right wave length?

August 24, 2007 | Unregistered CommenterLarry

I love your charts, however, what play would you suggest in either scenario, or should you insure yourself with a straddled position?

In response to the comment from Larry: A very reliable trend is the counter movement of Gold vs. USD, the usually do the opposite of each other. Gold is almost always a winning bet in a declining USD market.

However, with the tinkering that goes on with gold futures and value by banking interests and politicians, mainly because currency is debt based (fiat) and not standardized (tangibly exchangeable) you could see an unusual decline or stability of gold, silver (way undervalued), and platinum.

This will be because of a need to bail out war spending by printing more 4 cent notes. If tangibles become popular, either out of fear or strategy (inflation hedging), then currency losses strength and the wizards curtain is pulled back.

August 26, 2007 | Unregistered Commenter1wealthbuilder

The fall back position is that they cannot print any more gold and the realization that the dollar is rapidly becoming a '4 cent note' will stampede investors into the only upwardly mobile asset class there is - precious metals.

Agree with you about silver by the way.

Also enjoyed reading your site.

September 22, 2007 | Unregistered CommenterGold Prices

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