The HUI Gold Index – Is it ready for Prime-Time $5,000?

Is the HUI Gold Bugs Index ready to Boom?

Eric Sprott was recently interviewed on Palisade Radio, where he was asked about his experience in the last gold and silver boom in the early 2000s.  That was the end of the tech boom, as capital began flowing out like a waterfall out of the sector into financials and hard assets.

A lot of gold and silver investors are expecting this to be the final push to get to $5,000 or $10,000 gold. But is it really going to go to that in just a couple of months?

There will be a lot of starts and stops on the way up. Really?!?!?! But, but, but….

What happened to the HUI during the last boom?

During the last gold boom, the HUI (NYSE Darca Gold Bugs Index) didn’t go straight up into. In fact, if you really looked at where the NASDAQ peaked in 2000 on March 10, 2010, where the HUI was 65.58, before dropping another 46% to bottom in November 2010.

As assets flowed out of the tech bubble into hard assets, driven by the explosive demand for commodities from China. China pushed the demand and prices higher igniting the demand boom.

From a price movement perspective, when we evaluate the average true range, which is prices change of the high and low for the day,in relation to the pervious days close within the index, delivered an average true range of 3.46% over 5 trading. And more importantly the ATR on a monthly basis was 18.19% on a 10 year basis.  Past history tells us don’t get too optimistic as things move up because you will see on avaerage 18% moves in prices on a monthly basis between the high and the low. Most investors arbitraily set a stop 10% stop loss, get pushed out of their position very easily. Passing their positions over to stronger hands. Professional traders understand the price action of the shares before going in to the position.

But what about the rush from the bottom of 2008 to 2011? 

Commodities consumption continued from China after the 2008-09 recession, and mine investment continued to pour in.

The peak in gold was focused primarily on the lack of confidence in public sector debt. You had the U.S. debt downgrade and the ongoing problems from the PIGS (Portugal, Italy, Greece and Spain). This lack of confidence was the key driver in pushing up gold and silver higher.

Investors flocked to private assets. You will notice not just gold and silver peaked, but also other commodities, like rare earth & copper peaked around the same time period. 

Where are we now with the HUI Gold Bugs Index?

The HUI, NYSE Darca Gold Bugs Index recently got above its starting point of 200 back in 1996. More importantly we finally working through phase 1 of the First Macro Capital Commodity Hype Cycle:

Phase 1:

  1. Gold prices started to rise since 2016
  2. Demand growing
  3. Bankrupt miners (Luna Gold) has re-emerged and looks to be cleaned up from the bankruptcy it went through.
  4. Investor sentiment is still low, as other hot sectors like blockchain, canabis are getting significant attention. Only the hardcore investors are focused on the sector right now.
  5. Expect a wash-out and a bit of hype from early investors.

This is positive, as it shows that we have gotten out of Phase 5 in the First Macro Capital Commodity Hype Index.

 

When we look at gold in terms of the current cycle, it appears that we are working our way through the second phase of the commodity hype cycle. You mean prices don’t go straight up to $10,000 so I can be a multi-millionaire?!?!?!

What does Phase 2 in the First Macro Capital Commodity Hype Cycle look like
• Prices are Rising – Yes
• Demand continues to outstrip supply – Partially – not from the massses.
• Buy-outs of smaller producers/explorers. Large investment boom in new mines – Not Yet
• Investor Psychology – “Let’s Buy ABC”….“Let’s try”. We are getting some participatinion

What catalysts do we need to the vitally important Phase 3, when a majority of the money will be made.

What do we really need for the price of gold to go higher?

Catalysts. We need to find factors that will push the price higher. Gold’s main factor for rising prices is reduced confidence.

What do we need to enter the third phase of the First Macro Capital Commodity Hype Cycle?

A lot of Gold and Silver investors are expecting this to be the final push to get to $5,000 or 10,000 gold. But is it really going to go to that price level in just a couple of months? No. It never goes straight up.

We need to see a loss of confidence in the Public sector.

A loss of confidence in the public sector will drive money out of government bonds (Federal, Municipal) and into private sector assets.  A catalyst coming from the public sector will be a reason. It will drive up prices in not just gold and silver, but anything related to private assets, that “you can get your hands on”.

Until the majority see the issues in owning public asset bonds, then gold will have its fits and starts.

 

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