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Trading Gold and the HUI Index Breakout

Ben Bernanke and the Federal Reserve finally did the expected and are providing the fuel to fire up the next leg of this gold bull market. The last few months were choppy and it was an open question as to whether they were going to let the euro fail. But, of course, all central bankers can agree on one thing: continuing to bail out their buddies with freshly created currency units.

The zero interest rate policy now appears to be permanent and now, the Fed has decided to target nominal GDP growth. Their aim is to keep interest rates low and contain inflation around 2%, while at the same time trying to maintain an economic growth target via the printing press. We wish you the best of luck, Weimar Ben. We are entering a period of what many analysts call financial repression. A period of time where interest rates are kept low and inflation of the money supply is allowed to run high. The extremist Keynesians who are attempting to centrally plan the economy consider this a recipe for eliminating debt. While running the printing presses inflates away the massive debts of the west, it inflicts terrible punishment on savers and the poorest among us.

Your savings and paper dollars will continue to lose value since it is virtually impossible to beat price inflation in an environment of real negative interest rates. We will witness the hard asset bull market of a life-time. One that will continue far longer than most expect. Commodities are the building blocks of our economy and the appetite for consumption, especially in developing nations is high. Protection of wealth through the possession of gold and silver (i.e. real money) has been accepted in every culture around the world for thousands of years. Only in the last 100 years has the arrogance of the ruling classes gone so far as to declare a monopoly on the production of "money". The world is finally waking up to what hard money advocates and students of the Austrian Business Cycle Theory (ABCT) have known for quite a while now: that you can't print your way to prosperity. The printing presses at the Federal Reserve are fighting losing battle against the laws of the universe. Supply and demand will rule the day and prices for goods and services will adjust accordingly.

Gold has been given the green light

In last week's review to subscribers we mentioned that gold was nearing resistance, and that the Fed policy meeting would provide us with the next direction on gold. Since the moment Ben Bernanke opened his mouth with his latest plan to destroy the dollar, gold took off and hasn't looked back. Silver and most base metals followed suit.

The market tested support in gold back in December. Since then the price has reversed and is now moving towards resistance. The last few days have seen a strong move in gold, breaking above the down channel shown in the chart below.

We suspect prices to stabilize above $1700 in the coming weeks, with a possible move above $1750 and then to $1800. At that price we expect to see a short round of selling back towards $1700 as a test of support. A new trading range appears to be developing in between $1700 and $1800. If you are trading paper gold, we suggest placing a bid slightly above $1700. If we see a slight correction this coming week, you should consider selling into a strong rally above $1770.

Trading range for the first two weeks of February:

Buy Range: $1700
Sell Range: $1800

$GOLD (Gold - Spot Price (EOD)) CME

The HUI and the Gold Mining Shares

With gold making a nice trending move higher, the HUI index is moving up along with it. The last few days have clearly moved the index up towards the middle of the year-long trading range. Up until the beginning of this past week everything was in the buy zone. Prices were looking to test the December lows and took a pause after having a great move upwards in the first two weeks of 2012. Now that the Fed has spoken, the commodities sector in general has been given a lift. The gold mining stocks have been particularly responsive.

The HUI is now sitting in the middle of a trading range around 550. If we see a correction of gold back towards $1700, we suspect that the HUI index could correct back to 510-520. This is where we want to be placing bids for new trading and core positions. If gold continues to advance towards $1800 in the coming weeks then we suspect the HUI will move higher towards 570-600. At that point we will be looking to exit our trading positions.

If you plan on trading the mining stocks, paying attention to the overall sector using an index such as the HUI is very important. It will guide you in determining if the sector is overbought or oversold. This is what drives our decisions with regards to adding to or selling our trading positions. We suggest buying in our portfolio on slight pull backs of around 10%. In the next few weeks, we will be trading out of our current open positions. However we are nowhere near the sell zone and the indicators all show that the gold mining sector still has room to run before we get close to the target sell zone.

Trading range for the first two weeks of February:

Buy Range: 520
Sell Range: 580

$HUI (Gold Bugs Index - AMEX) INDX


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