The way the HUI has declined, you would figure that it was going south all the way. Of course, that’s what the markets want you to think as the markets want to shake off anyone riding this gold bull, that bought high this summer. Choosing a bull market is what will get investors burnt, as they always buy high and then sell low in disgust, when the asset class starts to go down.
The majority buys on the way up, very few buy, on the way down, like the contrarians did in 2015. Even in the summer of 2013, gold stock insiders (contrarians) were going on a buying rampage, that convinced me that a major bottom was near.
The HUI decline is also another great example that retracement ratios don’t work in general. Waves are never, ever even acting patterns so retracement levels are always changing. Are there any bullish gold stock analysts that are screaming that a 60% retracement is complete, and that it is time to buy gold stocks?
Sure gold stocks can go lower at any time, so there is always a downside risk. We are at about a 61% net retracement right now, and the HUI is poking the lower parallel trend line. We should at least see a rally that can break the top trend line, but we have already run long enough for a Minor degree correction to have completed.
One of the great indicators I use is the Gold/Hui ratio, which gives us an objective view, how cheap or expensive gold stocks are, when compared to the cash price of gold. At a minimum, we need two readings, one from a major top, and one from a major bottom. This will give us the outside parameters, close enough to give us something to work with.
Today this Gold/Hui ratio sits at 6.6:1 from an oversold base of 10:1. The 3:1 ratio was the ratio at the top of the gold stock market in 2011. Once a real extreme ratio has been established, then rarely does that low get breached once the new bullish cycle starts. Contrarians know these ratios very well and I started using them as well. The majority never uses these types of indicators, because if they did, chances are good they will no longer work.
As I see it, we are still closer to the cheap side of things, than getting anywhere near any extreme expensive side. The expensive reading can only happen when, all the gold bulls are back again, and the HUI is pointing up.