Despite all the negativity surrounding the bullion price all the Gold orientated indexes are climbing up the Rating Table with increased rating values. Both the Toronto and Philadelphia gold indexes have moved above the Dow ……as has the Gold price !!
This unexpected and unusual action makes me extremely interested in this discarded and reviled corner of the metals markets.
Whilst its Platinum and Palladium white metal cousins have surged for the past two years, Gold has buckled under the pressure of a strong US economy and currency. Despite the Euro bank and several gold producers recent attempts to curtail hedge fund short selling by contracting the physical bullion availability, the bullion houses appear to be continuing with their negative actions. However all the technical data indicates that this is rapidly coming to an end - and that a sudden surge in the world's ultimate panic hedge is in the cards.
The chart of the gold price has not been of interest for quite some time. But last August when the Euro banks announced their moratorium on the lending of bullion and placed a 400 ton per annum ceiling on gold sales, it caught many of the hedge funds and heavily hedged producers a la Ashanti with their trousers down. This unforeseen action caused a major chart break. The downtrend from early 1996 was broken. Since the catapult to $338 of last September, the gold price has drifted back to test the major $270 support level. In doing so it has mapped out a potential head and shoulders bottom pattern. However, this is not the most significant action.
Please note the divergence buy signal - as the golden oscillator refused to confirm the bullion nosedive to its $252 low of June last year. This was a clear long-term signal, which indicated a retest of the $252 level was most unlikely. More recently, bullion has continued to hover around the $280 mark. But associated gold shares have started to appreciate in price. I am firmly of the opinion - based on over 30 years experience in analyzing gold and gold stocks - that the shares lead bullion, not the reverse.
The Gold to Platinum ratio used to gyrate between 75% and 100% marks. When the 100% level was attained, it signaled that Gold was over valued versus Platinum - and that dealers should short Gold, and go long Platinum. Conversely, a fall to 70% would signal the watcher to go long Gold - and short Platinum. However, the inability of the Russians to meet their supply guesstimates resulted in the well-documented price surge in Platinum - as the South African mines battled to fulfill the shortfall.
Both the huge Impala and Amplat mines in South Africa have embarked on significant expansion programmes. And along with the smaller Northam and KPM mines will soon be in a position to better meet platinum demands. But this is not the point.
The Platinum price change resulted in the Gold / Platinum ratio falling to its lowest level in 20 years. These data indicate Gold is either greatly under valued, or alternatively, Platinum is crazily over valued - whichever way you wish to look at it.
But once again, it is the oscillator data that is of most significance - as it refuses to mirror the new lows on the ratio index, thereby setting up a buy divergence for the trend to move upwards in favour of Gold. Thus, I must look for a superior performance from Gold relative to its Platinum cousin in the near future.
In a true bull market, Gold stocks always out perform bullion - especially in the more marginal mines. This reason for this is the fact that earnings and profits tend to accelerate exponentially, as the Gold price appreciates above the mine's breakeven levels. Thus, if we are to look for signals of a resurgent Gold price, it must be accompanied by recovering Gold share prices - and especially signs of the shares wanting to out-perform bullion.
In this respect I analyse below the $ based FT Gold index relative to the bullion price - as well as Homestake, a North-American mine.
Correlation of the FT Gold index to bullion in the chart below shows another oscillator divergence buy signal in progress. This indicates that the major downtrend - in which the FT Gold index has under performed bullion for the past five years - is about to reverse to a positive trend. Note the same oscillator divergence signals for both upward and downward trend alternations on this ratio line at the previous major direction changes. There is evidence that the ratio line will, in the near future, turn in favour of the FT Gold index. This is a prerequisite for a true bull market in gold and gold shares.
Similarly, the Homestake vs bullion chart demonstrates the identical oscillator divergences, as it has done successfully in the past. This is interesting, since the FT Gold index is slanted towards the South African and Oz shares, whilst Homestake represents the North-American position.
Almost identical divergence pictures are evident on the Toronto Gold and ASA charts, confirming the emergence of a potential trend change in this chart in favour of the Gold shares and indexes out-performing bullion.
Gold Fields Ltd. is one of the world's major gold mining groups that has emerged since the drastic rationalization of the South African gold mining industry. Its last quarterly report illustrates what can be achieved by cost control in tight market conditions. But the main factor of interest is its completely unhedged position. Cost control is a critical aspect of mine profitability, especially in an unhedged position, fully exposed to gold price fluctuations. Gold Fields reduced operating costs to around $230 per ounce. This compares favourably to the more marginal Durban Deep with costs around $280 - notwithstanding the latter's proceeds from forward sales at higher gold prices.
Gold Fields is listed in Johannesburg, London and New York. It is a truly global gold share.
The US$ chart of Gold Fields is extremely interesting in the light of its full exposure to the vagaries of the fluctuating gold price.
There are three aspects of note:
- The potential head & shoulders bottom pattern that has formed over the past month - very bulish.
- The break in the down trend since February - very bulish.
- The most important factor is the buy divergence - as the oscillator refused to confirm the new low from the left shoulder into the head of the chart pattern in late April. A text-book example of the combination analysis of chart patterns and divergence.
All these factors are bullish for this major gold share.
Gold Fields Ltd. should be the core position of the gold section of any diversified investment portfolio.
'Bullion Action' is compiled by Dr. Clive Roffey.
15 May 2000
Note: Dr. Clive Roffey is South Africa's leading Technical Analyst, whose forte is gold mining stocks.
"Bullion Action" is part of a larger report on metals called "Metals Action." The first issues of "Metals Action" are available to readers, who request via: