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[yikyak] 02/2/2007 12:26

My view on HUI and Gold (Abstract)
Thomas Z. Tan, CFA, MBA
January 30, 2007

I published an article last August about gold and HUI on 5 websites (gold-eagle.com, goldseek.com, 321gold.com, savehaven.com, theaureport.com) and have received many comments and feedback from viewers. It has been 1/2 year since and all my views have remained the same. Here is the abstract of that article. Personally I have started trading gold and miners since 2003 and really enjoy reading the enlightening insights from Jim Sinclair's (Mr. Gold) website. I want to write this to show my appreciation for all the work and guidance he has given to us all here.

My main points of this article are: 1) We should view HUI as a derivative of gold, and it will give better indication and wave count than gold itself; 2) Gold is at the early phase of Elliott wave III.

Part One - HUI
I view HUI as a very long- term call option of gold. The best movement of HUI is from the bottom of $38 at the end of 2000 to $160 in 2002 (400% return in 1.5 year), while gold itself has gone only from $250 to $325 (30%) with HUI leveraging 10x. However, from 2002 to now, for 4 long years, HUI is up only from $160 to $320 (100%), in par with gold from $325 to $650 (100%).

The average cost on gold for the HUI miners is believed to be around $325/oz. When gold reached the bottom of $250 in 2000, HUI behaved like 100 calls ($0.38/call) with $75 out of money, and not worth much. Then gold slowly rose to $325 in the next 1.5 years and finally put HUI at the money (at its strike price) with $160 per 100 calls due to their time and volatility premium according to the Black Scholes model. When gold price keeps improving, HUI becomes more and more in the money. The ratio of change between HUI vs. gold is approaching one, the so-called delta hedging of a call. That is exactly what has happened last 4 years when HUI has moved from $160 to $330, or 100% return, "magically" matching gold from $325 to $650, also 100%. The option nature explains the leading nature of HUI to gold. It also implies that any technical analysis (TA) on gold alone such as Elliott Wave Projection (EWP), would only make sense if the same analysis on HUI is correct.

HUI has deviated short term from gold several times, with the longest deviation during 2004. Gold was able to creep up to a higher high but HUI couldn't and lagged behind. This is due to the lack of arbitrage mechanism between HUI and gold since there is not a good basket of companies or index which is closely but inversely correlated to gold, thus unable to engage put-call parity trades (c-p = S-X). Why is the deviation then? In 2004, even gold rose slowly and made new highs, no one believed that gold would stay at the level of $400-$450 very long, people's expectation was that gold would eventually go back to $300-$350 level (again near the strike price). HUI as a composition of 15 unhedged miners, correctly reflected the mass public views at that time by discounting the future earnings and reserves, and traded at "discount" to gold. Will this happen today? I don't think so. The public consensus has accepted a higher gold price with a much more positive sentiment now than in 2004.

Will HUI ever trade in "premium" to gold in the future? My view is unlikely and the reasons are: 1) Companies have too many risks such as geopolitical, reserve, management, capacity, operations, capital. 2) Reserves will eventually run out and finding and securing new reserve is always the biggest risk. 3) Even if gold trades at stratospheric levels, due to capacity constraints, 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 substantially less than the peak price, even with low grade ore becoming profitable.

When HUI is more in the money, the market will evaluate gold miners less by earnings or P/E ratios, and more by the values of their reserves minus excavation costs. It makes more sense to invest in junior miners with large and good quality reserves.

Part Two - Gold
Long-Term Gold Target
I expect gold peaks at $4000-$5000 at the end of this bull market based on the following ratio analysis:

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 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%, with compounding and higher future inflation, gold should reach $3000-$4000 range to be comparable to $887.5 of 1980 $.
Gold ties more to M3 than any other factors. M3 is running out of control and rising exponentially. Economists have come up with $4000-$5000 gold in order to tie back to M3 in 1970s. There will be a repeat in the future when public views the greenback as worthless as in late 1970s.
Gold vs. Oil. At peak, Gold vs. Oil ratio could reach 30, putting gold to $4000 with oil at $133.
Gold now vs. 1970s. Gold was up from $35 to $887.5 (2500%) in 1970s. Using the same ratio from $250 bottom low, gold could reach over $6000.
From above, I believe gold will take us higher than just the CPI-adjusted $2000 (equivalent to $887.5 in 1980 $). Globalization will bring much higher demand for gold than in the 1970s with more severe scarcity of gold supplies along with larger and wealthier population. The western lifestyle would cause natural resource consumption increase exponentially and thus all commodity prices. It brings competition to devalue paper currencies of all countries alike to gain trade advantage. If the greenback, as the dominant and strongest currency in the world, collapses in the future, all paper currencies will collapse together, resulting in gold as the last currency standing and the only universal one everyone can trust. Central banks (CBs) will turn from sellers of gold to buyers, will have to compete to increase their gold reserves.

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 (a good example is that the real purpose of Bank of England selling half of their gold reserves in 1999 is still unknown). But this kind of manipulation (if true), the discontinued M3 and new CPI "adjustments," the lack of audit on CB's real gold positions, could backfire in the future. Just as $250 was an anomaly of gold at the bottom, public dissatisfaction, anxiety and insecurity will cause an irrational behavior at the top, bringing gold to stratosphere. Also with gold's bull market, the large bullion banks, acting as front for CBs, would not be able to short gold and collect coupons on treasury to generate profit trades anymore. Thus the CBs have less ammunition to depress gold and eventually are defenseless to protect their fiat currencies.

EWP of gold
I feel using EWP long term on gold makes more sense than short term, especially in conjunction with HUI. The key here is to define where major wave II is. Many think we are currently at wave II due to the sharp drop in gold from $730-$550. I tend to disagree. Just look at HUI instead of gold, the major wave I was obvious from the end of 2000 to the end of 2003, lasting 3 years, while wave II was during the end of 2003 to mid 2005, lasting 1.5 years, and all other drops were 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. There is also debate whether gold bottomed at 1999 or 2001, from HUI perspective, gold reached bottom at 2001. As I indicated, EWP of HUI is more logical 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. EWP basically reflects mass public emotions.

If true, we are currently at wave III, with length reasonably estimated for 3 years. Today wave III is only 1.5 year, the run from $420 to $730 could be sub-wave 1 followed by $730-$550 sub-wave 2 ending Q4 2006. We are in sub-wave 3 of wave III which should be the strongest and last until Q4 2007. The whole wave III should last until around end of 2008, bringing us to $1800-$2000, a 400% return from wave II bottom. After wave III, I expect a serious correction from wave IV, lasting for two years, similar to 1974-1976, bringing us down to about $1200 (50% correction) before a run away upleg to my final $4000-$5000 target, another 400% gain. Anything is possible in the market, so don't take all the targets as granted. The upcoming wave behavior should give us better clues on both time and price targets.

If true, by using the same ratio of peak of $887.5 at 1980 to $250 at 2001, gold should bottom at $1100-$1400 as the absolute bottom at the next major bear market that can last for another 20 years. Even so, gold will still remain at four digits for this and next generation, thus never be at three digits again.
When will be the best time to buy gold? Answer: If not now, when?

Thomas Z. Tan, CFA, MBA
[e-mail]

Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their brokers and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

[yikyak] 13/1/2007 11:26

Dear Jim,

See the chart below.

Something that should be of interest to our readers is the current developments in the grain markets.

As you know, during most of the commodity-wide rally that has taken place over the last few years, the grain sector has been a relative laggard when compared to the extent of gains we have witnessed in some of the other sectors. Several market analysts have commented on the fact that when grain prices were compared to the commodity sector as a whole, they were actually quite cheap in historical terms.

Today the USDA issued a report which sent shockwaves through the entirety of the grain complex but especially the corn market. The report on crop output and usage estimated that old crop corn ending supplies in August of this year will be roughly the equivalent of three weeks of corn usage. That is simply staggering! Corn immediately responded by opening at limit bid and as of the close today, there remains an estimated 90,000 or better bids to buy at the limit price. That suggests corn will open limit up this coming Tuesday barring any unforeseen developments over the weekend.

The reason I mention this to our readers is that the rally in the grain complex is the market attempting to adjust to the new source of additional demand for corn in ethanol production – something which is not a flash in the pan kind of demand that comes and goes but rather a wholesale change in the supply/demand structure of the corn market. There is a spillover effect that has caused both soybean and wheat prices to rally as well.

The implications for this are enormous on the food chain here in the US. Corn is the primary feed source for the broiler and the livestock sector. Along with feed wheat and soymeal, the increase in price has a significant effect on the profitability of chicken, hog and cattle producers. Simply put, those guys are in direct competition with ethanol plants for available corn. The rising cost of corn has taken a huge toll on their profit margins and threatens the livestock and broiler industries. The only way they are going to be able to maintain current levels of production is to receive higher prices for their finished product since the cost of the grains to feed them is at a new higher level which looks to be here for some time. That in turn is going to require the packers being able to get higher prices for meat and chicken at the wholesale level so that they can offer more money to the producers. Of course, it goes without saying that prices must rise at the retail level to keep grocer margins profitable as well. In other word, brace yourself for higher meat and chicken prices in the months ahead.

Additionally, cereal makers, bread makers and anyone else that uses grain to make a baked or finished product of some sort faces the same predicament. They are going to have to charge higher prices to compensate for the increase in their input costs.

All of this is going to feed through into the food sector and translate into higher prices at grocery stores and restaurants. Consumers are going to see higher food bills – Period! The pencil pushers at the Commerce Department can massage and manipulate the data used to concoct the worthless CPI and will attempt to hide it, but real world experience is going to impact directly on the pocketbooks and wallets of Americans visiting the grocery store.

While the recent setback in the energy sector has taken some of the burden off of consumers from the high gasoline and heating oil prices seen earlier this year, higher food costs are on their way. Once the temporary surplus in gasoline and distillate stocks gets worked off and energy prices resume their uptrend or we get another surge in prices due to some sort of "10 sigma event", a double hit is going to be felt here at home.

Either way, it certainly has my attention.

Best wishes from your pal,
Dan

[yikyak] 05/1/2007 16:22

Goldbugs are a fickle bunch
They feed from crumbs left by the hedge funds lunch.

As every year goes by they wait and prey
That gold will make them squillionairs that day.

But every day it's the same old story
The Fed spews it's garbage and gets all the glory.

Common sense, the fed is screwed and we are right
but common sense is the rarest of commodities we learn whilst we fight.

But true goldbugs know manipulation can only delay
and unleveraged goldbugs will soon have their day.

When it comes it will be a sight to behold
as the portfolios increase at least fifteen fold. But money's not everything after this fight and besides you'll be busy giving money to those friends who 'didn't' believe you were right.

LGD

[yikyak] 27/12/2006 13:58

Country Money Supply
% Change on
Year Ago (Broad)

Australia +11.2 Sep
Britain +14.2 Oct
Canada + 8.6 Oct
Denmark + 9.1 Oct
Japan + 0.7 Oct
Sweden +10.6 Oct
Switzerland + 2.4 Oct
United States + 4.8 Oct
Euro Area + 8.5 Oct
Source: The Economist, Dec. 2, 2006



As the table on the left illustrates, broad money supply growth around the globe is running at high single digits or in some countries at double digits.
Shown in this table and the graph below, central banks around the globe continue to churn out the oceans of money that fuel the global financial system. That is the reason why asset markets are rising globally.

[yikyak] 15/11/2006 17:01

Are Arab Oil Kingdoms and China Attracted to Gold's Glitter?

By Gary Dorsch
November 13 , 2006

[yikyak] 05/10/2006 15:43

Could be walking towards a decent spike soon imho.

[arkan5doerf] 05/9/2006 15:27

While reading message boards a while back I found a gem. A newsletter that is dedicated to profiling little known issues. The list is 100% double opt-in to ensure that the members are truly looking for a lead.

It is certainly worth a few minutes of your time to take a look.

[yikyak] 05/9/2006 15:16

Twins seperated at birth?

[Abuse team] 05/9/2006 14:58

Post removed by ADVFN

[Abuse team] 05/9/2006 14:56

Post removed by ADVFN