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LOOK REPORT #26 Background: Any real-time dataset of prices or volume (i.e., daily, weekly, monthly) which is sufficiently long in duration can be examined to determine if predominant trading cycles are present within the dataset (it is possible the given dataset does not contain any such periodicities if, for example, it was composed of only “White Gaussian Noise”). A mathematical software routine called a Fast Fourier Transform (FFT) can determine the central periods of the trading cycles if they exist in an Index such as the HUI Index. In looking at the HUI Index with this technique over the past decade, it may be possible to gain some insights into the longer-term trends which have emerged. Of course, the technical analysis has to be used in conjunction with the current geopolitical events especially in the HUI Index which has characteristics of being manipulated on very periodic cycles. However, it has been noted by this author in numerous other decompositions of world indices the “major geopolitical events” tend to cluster around major tops/bottoms in certain cycles of the world indices. In the Magnificent Seven Series (see FSU Archives, Part XIV, Oct 2004), we showed the existence of a large 86-month cycle which occurs in POG (also see Chart 1A reproduced from that prediction) and it was predicted the cycle would not bottom until July 2006. At the time we stated in the Magnificent Seven Series on the POG prediction of Oct 2004: “Chart 3 (shown as Chart 1A in the current article) shows the comparison of the detrended price of Gold since 1968 versus the 86-month cycle in Gold. This chart strongly suggests there is going to be another major attack or downleg on the price of gold until it bottoms in mid-2006 (i.e., the Commercials may try and use this as a set-up for the Big Dance). However, at the time of this attack it is expected the price of gold could be around/over $500 an ounce. The magnitude of the drop in price could be about $40 -$60 an ounce based on the current amplitude of this cycle. This is the completion of a downside move in Gold that began in Oct 2003. It simply means there is additional time to accumulate the precious metals before launch in Aug 2006.” The previous history of POG prices show other major attacks on the POG price at/near the bottom of this 86-month cycle and we stated in 2004 that “no major rally in POG (i.e., Stage II) is possible until this cycle bottoms in 2006”. The amplitude of the 86-month cycle (two years ago) was $120/oz and this cycle has grown over $166/oz so it can be expected that drops in the price of gold could well exceed $150/oz as we have recently witnessed. In this article on the HUI Index, I am combining some comments of a Jan 2006 prediction on the daily HUI Index (which was not submitted to Financial Sense) with a recent update on the weekly prediction of the HUI Index thru 2007 and beyond. Seven (Daily) Cycles (Jan 2006): An FFT Routine run the daily closing prices of the HUI Index from 1994 thru Jan 2006 did find some major cycles in the HUI Index. The primary seven daily cycles in the HUI Index are at periods of 132, 166, 200, 268, 320, 498 and 840 days. In addition, there were seven minor trading cycles at 8, 18, 24, 28, 40, 65 and 76 days. A comparison of the sum of the seven primary cycles in the HUI Index versus the actual (detrended) HUI Index from 1994 thru Jan 2006 are shown in Chart 1. The seven large daily cycles determine the overall long term behavior of the detrended HUI Index waveform (lows/highs) during this period. It can also be readily noticed that the summation of the cycle amplitudes has been growing since 2001 consistent with the growth in the HUI Index.
The largest cycle in the HUI Index weekly closings (the 268-day cycle) is shown in Chart 2 from 1994 thru 2005. This major cycle has formed a top (Dec 15, 2005) and will start taking the HUI Index down with it into a major (final?) bottom in mid-June2006 (possibly already started). There maybe no significant mid-term rally in the HUI Index Daily Index again until this cycle bottoms in June 2006! The current waveform in the HUI does suggest a pending correction is coming. However, any major geopolitical event could affect gold prices immediately if not sooner.
Chart 3 shows the prediction for 268-day cycle in the HUI Daily Index from Jan 2006 thru 2007. The next bottom in this major cycle is predicted to occur in June 2006 with a top in Dec 2006. The coming bottom for June 2006 in the HUI Index would occur during a downward acceleration in major long term cycles in the DJIA and NYSE Indices. It may also occur during a continuing devaluation in the USD during 2006-2007. This graph also suggests an interesting phenomena which occurs at the top of the seventh cycle of a major and growing cycle. There could be a major downside correction or “crash” in the HUI Index after Dec 2007!?
Chart 4 shows the 268-day cycle in HUI Index versus the actual (detrended) closing daily prices in the HUI Index from 1994 thru Jan 2006. It shows the 268-day cycle started matching the overall tops and bottoms in the HUI Index after Jan 2001. This major cycle has been growing in amplitude since 2001 and is the current controlling cycle in the HUI Index. In other words, this cycle is being traded by some major players since 2001 and it is still ongoing. At this point the major cycle is headed downward which strongly suggests to place stop losses on major gold equities like Newmont which is a major component of the HUI Index thru June 2006. A major buy point maybe coming by/around June 06, 2006. (SR Sept 2006: This now looks to be premature in light of the continuing attacks on POG/Silver).
Chart 5 shows the prediction (sum of all cycles) of the HUI Index of 2006. It shows a major downward trend in the HUI Index until early June 2006 which could be the last major bottom in the HUI Index in this Millennium.
Chart 6 presents a comparison of the key 268-day cycle between Newmont and the HUI Index from 1996 thru 2005. In this period, Newmont has been the key component of the HUI Index and Newmont’s large cycles were slight leading the same cycle in the HUI Index. The 268-day cycle is continuing to build in significantly in amplitude and has reached a top or is forming a broad top. This will resolve itself as either a major downtrend coming in the HUI Index (as this cycle turns down) or there is a fundamental new direction taking place in gold stocks upward and this cycle will cease to play a role (first time in decades!?).
Comments (from Jan 2006):
Remarks: The email link was not correct in several previous “Quick Look Reports” since I have moved and it has been updated in this report. Chart 1A. The Predicted POG Price versus the 86-Month Cycle From Oct 2004 Article Published on FSU. Seven (Daily) Cycles (Sept 2006): An FFT Routine run the daily closing prices of the HUI Index in August 2006 did show some shifts in the daily cycles of the HUI Index. The primary seven daily cycles in the HUI Index (as of August 2006) are at periods of 130, 169, 192, 262, 317, 518 and 910 days. The best fit for the largest cycle was 910 days versus an earlier 840 days (in Jan 2006). The magnitude of the shift in the largest cycle strongly suggest some type of major shorting (by commercials) or selling of gold into the world markets (particularly in the past 90 days) by Central Banks which is causing an extended down cycle in the HUI Index or extended bottoming formation. We probably are currently on the second downleg in the “W-bottom formation” of the HUI Index (and it could go on for several months yet). Chart 7 shows the four largest daily cycle in HUI Daily Index. This particular dataset was not long enough to include the 86-month cycle (which is forming a bottom) and in the future this cycle will appear to simply add to the linear slope increase in 2007/2009 of the HUI Index. Several cycles have grown about equal in amplitude so the 262-day cycle no longer controls the overall HUI Index. The largest cycle (910-day) cycle is growing in amplitude and is currently forming a top (so smaller cycles are dominating the action in the HUI Index) and two other large weekly cycles are forming a bottom.
Chart 8 shows the prediction of the HUI Daily Index for 2007. It appears that a rally will begin in late 2006 leading to another drop (or double bottom) in early March 2007. After March 2007, we are predicting an explosive rally to take place in the HUI Index leading into July 2007 (this may suggest some type of geopolitical crisis in early to mid-2007 or drop in the USD). This could be the beginning of the Stage II Rally (i.e., a major change in the linear slope of the HUI Index) which may come over two separate time periods in 2007/2008.
Chart 9 shows the prediction of the HUI Daily Index for 2008. It suggests that a Stage IIB rally will begin in August 2008 preceded by some consolidation phase (probably ascending triangle). However, the HUI Index is predicted to continue a long-term upward trend into 2010.
Remarks (Sept 2006): 1. The current (breath-taking) drop in 2006 in the HUI Index (and gold prices) were expected/predicted from Oct 2004 FSU Article on the basis of the 86-month cycle and the “crash” in HUI Index/POG was also predicted to have a rather large magnitude. This is probably a planned and controlled periodic attack (by Central Banks) to support the fiat currencies while setting up an economic worldwide “stagflation” to try and deflate asset bubbles (soft landing). This should be good news for the HUI Index and gold for the next coming stage in 2007-2010 (and it is going to be explosive) – we will have to wait and see. Since the time-scale of the major long cycle in the HUI Index involves a period of over seven years (the proverbial seven year cycle), it is difficult to see it coming without specialized software (and they like it if you cannot see it coming). In retrospect, this appears to be business as usual for certain unnamed Central Bankers (going back several decades). 2. While gold prices could yet go down into $540-$565 range, the current waveform in the HUI Index suggests do not buy the “hype” that the commodities bull is over in PM stocks. In fact, the fun does not really start until early/mid 2007 for the HUI Index. There are predicted explosive rallies coming in PM stocks for 2007/2008 (and in the price of gold/silver bullion) despite continuing attacks by the PPT Team/Central Banks. By the end of 2010, the USD could be in a major coming crisis as gold continues to increase in value. If the Central Banks will keep selling gold and the worldwide public keeps buying, we can all compare notes in July 2010 and hold a post-mortem on the question of whether the Asian Central Bankers should have continued to support USD and other major debtor fiat currencies by buying long-term US Treasuries versus buying up all the precious metals (or are they doing that now at fire sale prices?). So what is China and Russia really going to do in the next five years? 3. Whether to buy (or continue buying) PM stocks and/or gold and silver is one of the toughest investment decisions the investing public may ever make and the volatility is wild. This analysis may change of Central Banks continue to attack PM markets and could be all wrong in the future. On the one hand, we may have the (final) buying opportunity of a lifetime in the next twelve to eighteen months or the Central Banks may continue to suppress the price of gold so that 99.9999% of the investing public will never consider touching it or sell what they have. It is also possible (following the 86-month cycle), the day is coming when this small PM market will make some people very wealthy in the next seven years and that could be the end of PM markets (as we know them today) forever. So are you a buyer or seller here? In this worldwide PM casino, you ultimately pay your money and you take your chances or go sit on the sidelines with the CNN cheerleaders pushing world equities. Retirees may wish to stay with T-Bills and avoid the heart stopping swings in HUI Index and coming declines in NYSE and world markets in next three years. 4. It is yet possible that just when globalization appears to be winning everything in the future – globalization loses (as the world cannot solve its energy/food/water production problems and support the coming population growth). In that event, the material world goes back to being much smaller regional or local markets with a much smaller population and all this may yet happen by 2051 as no real (World Government) planning evident yet to try and solve the real problem set (hey let’s build more nuclear plants, import LNG, build a huge number of bio-diesel vehicles and water front condos, and tow icebergs off the coast of California!?). There is an old prophecy that states there will come a day “when gold and silver will lie in the streets and nobody will even stop to pick-it up”. However, that day has not yet come - has it?
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INFORMATION DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments. |
