From hitting a Ratio high of over 46 in late 2003, the number of silver ounces to "buy" the HUI has now hit its lower channel bottom of 24. In silver terms, the HUI has never been cheaper since 2001 when the Ratio was 10, and silver was on life support and being given last rites. Only in 2002 has the Ratio been lower at 20ish. Gold stocks are cheap. When the black trend line is increasing the price of silver is declining or the stocks are going up faster. Inversely, when the HUI/Silver Ratio is declining it takes fewer ounces to buy the same stocks. You are dividing the HUI by the silver price. It's one of those mindfreak things where it's difficult for many of us to think in relative value terms without our dollar as the medium. Of course, when both the red and purple trend lines go into decline you want dem dollars!
The actual HUI (red line) and silver price (purple) are included as overlays to give you the coincident performance of each. While the upper channel boundaries for the Ratio appear to be between 33-35, there is now a lower upper boundary set at 30.95 and 30.99 in April & July of 2006.
In summary, we know the stocks don't move up (or down) of any meaningful duration without the metals going in the same direction. If you're in agreement then, with silver right at its lower boundary of 24 ,we are going to have one gangbuster of a precious metals stock rally. Those two recent lower boundary highs of 30.95 and 30.99 concern me though. Everything looked okay until late January '06 when the Ratio and the HUI began a descent. Silver kept going up, and even though the HUI and silver price recovered in March, the Ratio continued to decline and outperform. What could be is that we now have a lower upper boundary established at 30-31. The original lower channel boundary of 24 will probably hold and even go lower as silver picks up steam. We shall see. What this means is that perhaps those holding the larger market cap precious metals stocks won't get the leverage this time around that they've been enjoying since 2002.
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