The HUI to GOLD ratio paints a very different picture for the PM bull market compared to either the HUI or GOLD. When viewing the HUI or GOLD separately from the ratio, it becomes very apparent that the HUI to GOLD ratio is now 1 complete rally cycle behind the HUI and GOLD. Below are 3 charts, one of the HUI, one of GOLD and then one of the ratio. On the HUI and GOLD charts you will clearly see we are now into our 5th rally leg where as the ratio chart is one rally leg behind, now only in its 4th rally leg. Notice also the purple vertical line that shows the 2003 - 2004 top that is so important in understanding why the ratio chart is one cycle behind and the blue vertical line that shows the breakout, for the HUI and GOLD, but not for the HUI to GOLD ratio.
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The 2003 - 2004 top is the last area where the HUI was out pacing GOLD as shown by the HUI to GOLD ratio chart. From that important top neither the HUI or GOLD could get the upper hand, thereby creating a 4 year triangle consolidation pattern on the HUI to GOLD ratio chart that is still unbroken to the upside. Even though both the HUI and GOLD have rallied to new highs the ratio chart is still languishing within the very large triangle consolidation pattern that is getting ripe for a breakout to the upside IMHO. In order for the ratio chart to rise the HUI has to be relatively stronger than GOLD giving us a rising trend channel. This happened until we hit the 2003 - 2004 top.
Now that you can see how we are 1 rally cycle behind both the HUI and GOLD, lets take a look at the HUI to GOLD ratio chart a little closer and see what it may be telling us. There is a story there if we can extrapolate the clues and put them into some kind of coherent meaning. First, there is the big 4 year triangle consolidation pattern that sticks out like a sore thumb starting with the 2003 - 2004 top. That was the end of our first big wave I up, and the beginning of our current wave II down. That puts our current Elliot Wave count at, just the beginning of wave 1 of III instead of the 3 of III for the HUI and GOLD. Second, we have had a 50% fib retrace of the whole bull market down to the .39 area that says low enough. A 50% retrace is just about right for this area of the bull market. Third, there is a symmetry, just like the HUI, that has a certain beauty to it. When you look at wave I up, it is easy to count the 5 waves separated by the 2 beautiful little triangle consolidation patterns. It took just over 3 years to complete our big wave I.
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The big blue triangle or wave II down will act as a halfway pattern separating waves I and III. If symmetry holds, then we are probably looking at a 3 year rally phase at the least, lasting out to the 2nd half of 2010. This may not sound right as I’m looking out to the 2nd half of 2009 for the HUI and GOLD to top out in their wave 3 of III. Remember, the HUI to GOLD ratio is 1 rally cycle behind and I think the little guys will have a speculative run for their wave 3 of III finish. There’s an old expression on wall street that says,when the little stocks have their move it will signal the end of that particular move, which makes sense if you think about it. The big stocks will be distributing shares as the speculative frenzy in the small stocks is taking place similar to the 2003 - 2004 top.
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The pain of having to sit thru a rally cycle can be very excruciating when day after day you see your portfolio just sitting there and possibly going lower as the bigger caps and producers are enjoying all the fun. At some point the little guys will have their day and it will more than make up for all the pain and suffering that is all part of this game of investing. If it was easy everyone would be millionaires.
Bottom line here is that it looks like it is getting closer for the HUI to start outperforming GOLD in a way we haven’t seen since the 2003 - 2004 top almost 4 years ago. Watch for the breakout of the HUI to GOLD ratio chart for clues as to GOLD stocks finally getting the upper hand for awhile and having a run that will knock the socks off of just about every other trading vehicle.
All the best…Rambus