Friday, October 30, 2009

Gold and the Gold Bugs Index (HUI).

Gold Bugs Index (HUI)
Gold Bugs Index (HUI)
Chart is courtesy of marketclub.
Marketclub - Gold Bugs Index (HUI) Trend Analysis.

HUI Index - Kitco.comToday we will be looking at the Gold Bugs Index, better known as the HUI Index. I assume most of my readers will know that there are two major gold indices, one of them is the HUI Index and the other is the Philadelphia Gold and Silver Sector Index or XAU Index. There are others of course but I will focus on these ones for now and in particular the HUI Index. The HUI Index is listed on the American Stock Exchange while the XAU Index is listed on the Philadelphia Stock Exchange. So, why two indexes? Well, the HUI Index is solely comprised of mining stocks that do not hedge their gold prices for more than a year-and-a-half into the future.

That is thus a very big difference and one which should be understood and remembered. Why? Well, because that makes a huge difference investment wise. If you think prices of gold are going to rise than I as an investor would rather be invested in the HUI Index than in the XAU Index. So, with a rise in gold prices you will see more gains on the HUI Index than on the XAU Index. Then again, you will also be hit harder when gold prices fall.

So, chart wise I'm sure most will have already looked at the trend lines I've placed upon the chart. Now, honestly, you tell me, ain't those two of the most beautiful trend lines you've ever seen?

Now, I will be the last person telling you that you should let a pair of simple trend lines guide you in your investment decisions! However, they are there! Aren't they? Right there on the chart, back from the lows of when the crisis was in full bloom until where we are now. Perfect trend line!

Gold Bar - BullionVaultSo, where does that leave us now? Well, I'd say at a critical juncture again. I'd say the fundamentals, real value wise, for the whole gold and silver market are far too great and far surpass every other sector out there, so based on that I can definitely understand why the HUI Index has held and traded around the 380 - 400 for the last three days.

I will make a wager that most every banker, analyst, chartist, broker, fund manager and practically all you can think that invest in gold are looking at those very same trend lines I've drawn. Only difference, all will draw their very own conclusions, some wrong, some right. Time will tell who got it right in the end.

So, I must conclude that yes indeed, those trend lines are just two plain lines on a chart, however, in this case they provide a very clear picture of where we are right now. I think most will agree if I call it standing at the bottom of our lower trend line. All agreed?

So, based on golds strong fundamentals as leading indicator for the HUI Index, the fact that we are at the low of our trend line, the fact that Stochastics is already in the overbought zone and turning back up, the fact that we have traded for 3 days with the same range of prices and not breaking down the trend line makes we wonder if this is not a bottom in the making?

Bad would be the downward trending MACD I'm looking at which is looking to go below zero which indicates a confirmed downtrend is in the works. But luckily, the MACD might very well turn back up from here. Worst case, the HUI Index will look up the 200 Moving Average at around 350 and will find support there.

Well, if we do turn up from here which I think we will, then we are looking at a long term target of around 480 and if it breaks the upper trend line then I'm even more bullish.

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