HUI: The Illusionist's Trick Left Investors Speechless

1. HUI: The Illusionist's Trick
Left Investors Speechless

2. Point To Be Discussed Today:
• The Gold Miners
• HUI: Gold Bug Index
• Underperformance Of Gold Stocks
• HUI Index
• GDX ETF
• Gold , Silver & Mining Stocks
• US Nominal & Real GDP Annual Growth
• Gold To Rally Further

3. The Gold Miners
• After the HUI Index plunged by more than 10% and made all of its 2021
gains disappear, the magic trick left investors in a state of shock. But while
Mr. Market still hasn’t sawed the HUI Index in half, the illusionist is likely
gearing up for his greatest reveal.
• Case in point: while the Zig Zag Girl captivated audiences in the 1960s,
the HUI Index’s zigzag correction leaves little to the imagination. And with
the recent swoon a lot more than just smoke and mirrors, the HUI Index’s
short-term optimism will likely vanish into thin air.
• To explain, despite the profound drawdown, the HUI Index hasn’t been
able to muster a typical relief rally.
• Moreover, with ominous signals increasing week by week, if history
rhymes (as it tends to), the HUI Index will likely find medium-term support
in the 100-to-150 range.
• For context, high-end 2020 support implies a move back to 150, while low-
end 2015 support implies a move back to 100. And yes, it could really
happen, even though such predictions seem unthinkable.

4. HUI: Gold Bug Index

5. Underperformance Of Gold Stocks
• The underperformance of gold stocks relative to gold is also
worthy of attention.
• With the junior miners often performing the worst during
medium-term drawdowns, short positions in the GDXJ ETF will
likely offer the best risk-reward ratio.
• To that point, if you held firm in 2008 and 2013 and maintained
your short positions, you almost certainly realized substantial
profits.
• And while there are instances when it’s wise to exit one’s short
positions, the prospect of missing out on the forthcoming slide
makes it quite risky.

6. HUI Index
• What happened three weeks ago was that gold rallied by almost $30 ($28.60) and at the same
time, the HUI – a flagship proxy for gold stocks… Declined by 1.37. In other words, gold
stocks completely ignored gold’s gains.
• That shows exceptional weakness on the weekly basis and is a very bearish sign for the following
weeks.
• Thus, while the HUI Index remains steady for the time being, back in 2008, the ominous
underperformance signaled that trouble was ahead. To explain, right before the huge slide in late
September and early October, gold was still moving to new intraday highs; the HUI Index was
ignoring that, and then it declined despite gold’s rally.
• However, it was also the case that the general stock market suffered materially. If stocks hadn’t
declined back then so profoundly, gold stocks’ underperformance relative to gold would have likely
been present but more moderate.
• Nonetheless, the HUI Index’s bearish head & shoulders pattern is extremely concerning. When the
HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8%
of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top
– the right shoulder – formed close to the price where the left shoulder topped. And in early
2020, the left shoulder topped at 303.02.
• Thus, three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here),
all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of
the declines exceeded the size of the head of the pattern.

7. HUI Index - I
• In addition, when the HUI Index peaked on Sep. 21, 2012, that was just the initial
high in gold. At that time, the S&P 500 was moving back and forth with lower
highs.
• And what was the eventual climax? Well, gold made a new high before peaking
on Oct. 5. In conjunction, the S&P 500 almost (!) moved to new highs, and
despite the bullish tailwinds from both parties, the HUI Index didn’t reach new
heights.
• The bottom line? The similarity to how the final counter-trend rally ended in 2012
(and to a smaller extent in 2008) remains uncanny.
• As a result, we’re confronted with two bearish scenarios:
1.If things develop as they did in 2000 and 2012-2013, gold stocks are likely to
bottom close to their early-2020 high.
2.If things develop like in 2008 (which might be the case, given the extremely high
participation of the investment public in the stock market and other markets), gold
stocks could re-test (or break slightly below) their 2016 low.

8. GDX ETF
• Keep in mind though: scenario #2 most likely requires equities to
participate. In 2008 and 2020, sharp drawdowns in the HUI Index
coincided with significant drawdowns of the S&P 500.
• However, with the Fed turning hawkish and investors extremely
allergic to higher interest rates, the likelihood of a three-peat remains
relatively high.
• If we turn our attention to the GDX ETF, lower highs and lower lows
have become mainstays of the senior miners’ recent performance.
• Moreover, while the GDX ETF’s swift drawdown occurred on
significant volume, the recent bounce hasn’t garnered much
optimism. As a result, we’re likely witnessing a corrective upswing
within a medium-term downtrend.

9. GDX ETF - I

10. GDX ETF - II
• Finally, comparing the current price action to the behavior that
we witnessed in 2012, back then, the GDX ETF corrected back
to the 38.2% Fibonacci retracement level and then continued to
make lower highs before eventually rolling over.
• And today, the senior miners are displaying similar weakness.
Gold stocks are declining even while correcting, and the lack of
meaningful upswings signals that the current environment is
very bearish.
•

11. GDX Vectors Gold Miners ETF

12. Gold , Silver & Mining Stocks
• In conclusion, while gold, silver, and mining stocks will attempt
to pull rabbits out of their hats, the bunnies’ bounce will likely
fade over the medium term.
• Moreover, with the precious metals searching for a magic bullet
that likely doesn’t exist, another disappointment could leave
investors without an ace in the hole.
• The bottom line? While gold, silver, and mining stocks will likely
dazzle the crowd in the years to come, their wizardry could
resemble black magic in the coming months.

13. Gold Asks: Will The Economic Boom Continue
• The US GDP has already recovered from the pandemic recession. What’s next for
the economy and the gold market?
• Ladies and Gentlemen, the economic crisis has ended.
• Actually, not only is the recession over but so is the recovery! This is at least
what the recent GDP readings are indicating.
• As the chart below shows, the US nominal GDP has already jumped above the pre-
pandemic level.
• The real GDP, which takes inflation into account, remained in the first quarter of
2021 below the size of the economy seen at the end of 2019, but it will likely
surpass this level in the second quarter of the year.

14. US Nominal & Real GDP

15. US Nominal & Real GDP Annual Growth
• As one can see in the chart
behind, in terms of GDP
growth, the situation is a bit
worse, as the annual
percentage changes are still
below the pre-epidemic
level.
• However, this should change
in the second quarter of
2021 when the growth pace
is likely to peak amid base
effect and reopening of the
economy.

16. Threats For Growth
• Will the economic boom become well-established or will we see a lot of
volatility or even new slumps?
• Given the recent flux of disappointing high-frequency indicators that fell
considerably short of expectations (just think about April’s nonfarm payrolls ),
the question is very relevant.
• Well, there are many threats to growth, that’s for sure. The first is, of
course, the ever-evolving coronavirus and its new variants.
• However, judging by preliminary evidence, the vaccines should remain
effective, allowing economies to function freely.

17. Threats For Growth - I
• The second obvious danger is clearly the economy overheating and higher
inflation. The Fed and the Congress injected a lot of liquidity into the economy although it
would recover if it was left to its own devices thanks to the rollout of vaccinations and
easing lockdowns.
• So, much of government funds arrived just when the economy practically recovered, which
is a recipe for higher prices and inflation-related turbulences in the financial markets.
• Third, the increase in debt – both private and public – makes the global economy more
fragile. Given the level of indebtedness, even small increases in real interest rates would
be dangerous.
• They would increase the costs of servicing debts for the governments and could hit the
asset prices. The fact that the Fed will be under great pressure to remain very dovish
is, of course, positive for gold prices.
• Even if we see some effort to normalize the monetary policy, interest rates and the Fed’s
balance sheet will never return to the pre-recession levels.

18. Threats For Growth - II
• Last but not least, there is a threat of financial crisis. Many people are worried that there is a bubble in the stock
market (and in other markets as well, such as the cryptocurrency market).
• Indeed, the equities have been reaching new peaks and the valuations are elevated. The margin debt has also
jumped. Not surprisingly, the relative frequency of Google searches for the “stock market bubble” has recently risen
(just as for the word “inflation”).
• Even the Fed in its latest Financial Stability Report expressed some concerns. This is what the Fed Governor Lael
Brainard said in a statement linked to the report :
• Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have
continued to rise from levels that were already elevated late last year.
• Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top of their historical
distribution, and the appetite for risk has increased broadly, as the "meme stock" episode demonstrated.
• Corporate bond markets are also seeing elevated risk appetite, and the spreads of lower quality speculative-grade
bonds relative to Treasury yields are among the tightest we have seen historically. The combination of stretched
valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects
of a re-pricing event.

19. Gold To Rally Further
• The US economy has already recovered from the coronavirus recession, which is
bad for safe-haven assets such as gold, as the yellow metal doesn’t like economic
expansions.
• However, there are important threats to sustainable economic growth, which should
support the price of gold.
• Actually, there is still room for gold to rally further. This is because we are in an
inflationary phase of the economic expansion (this boom will be more inflationary
than the post- Great Recession period), and all the money created during the
pandemic has flowed into the asset markets, pushing their prices into elevated
levels not necessarily justified by fundamentals (just think about Dogecoin). Gold
could benefit from such a bubble, as well as from an inflationary and hot
environment.

20. HUI: The Illusionist's Trick
Left Investors Speechless

21. THANKS FOR LISTENING
HUI: The Illusionist's Trick Left Investors Speechless