Technical Analysis of Why Gold

April 3, 2003

The term "technical analysis" is a complicated sounding name for a very basic approach to investing. Simply put, technical analysis is the study of prices, with charts being the primary tool. The roots of modern-day technical analysis stem from the Dow Theory, developed around 1900 by Charles Dow. Stemming either directly or indirectly from the Dow Theory, these roots include such principles as the trending nature of prices, prices discounting all known information, confirmation and divergence, volume mirroring changes in price, and support/ resistance. And of course, the widely followed Dow Jones Industrial Average is a direct offspring of the Dow Theory. Today, technical analysis is accepted as a viable analytical approach by most universities and brokerage firms. Rarely are large investments made without reviewing the technical climate. Yet even with its acceptance, the number of people who actually perform technical analysis remains relatively small.

€uro vs US$ Gold Prices

Gold Prices in perspective

With 12 European countries participating in the €uro pool of currencies, looking at Gold prices in €uros comes to comparing Gold in a mix of 12 different currencies. With the €uro / US$ exchange rates changes during the last couple of years, Gold Prices need to be looked at from different perspectives. The chart below shows quite a different view between the €uros and US$ Gold prices since early 2002.

Although Gold prices in €uros also show price increases over the last two years, their relative importance is a lot less drastic in €uros prices. This demonstrates one of the main advantages of Gold over Stocks for investors : Protection against devaluation and inflation.
This chart also shows that the recent Gold price correction was in fact due to the 1 year old €350 resistance line having been reached on Feb. 5th, 2003.

You will see below that this is quite normal, and was in fact expected. The correction currently taking place is in fact a pre-requisite before prices can start going up again.

Gold compared to Stocks :

Gold Price / S&P500 Index Long Term comparison chart

These charts show how Gold prices and Stocks generally move in opposite directions.

Things are not expected to get any better for the Stock Market, as you will see further down.

Spot Gold / S&P500 Index (Jan 2002 to Date)

S&P 500 / Gold Price Index

This chart shows the S&500 index divided by the NY price of Gold Ounces. We prefer to use the S&P500 over the Dow Jones only includes 30 stocks. Currently, the S&P / Gold Index is has come back down to its at July 1997 levels, less than half of where it was in August 1999 and 2000.

Long Term

Long Term overview of US$ Gold Price moves (Updated March 29th)

The chart below shows the Gold price movements since 1985. Overall, price movementshave been contained within a downward triangle materialized by the LT Resistance and Support lines.

After «working» the 25 years old Long Term Resistance for about 6 month in the end of 2002, Gold prices finally broke out of the downward triangle upward (as expected with a downward triangle), in Dec. 2002, and peaked at almost US$390 early Feb. 2003. A consolidation has taken place since early February 2003, as prices are doing a «pull back» towards the LT Resistance (that could become a support for the current price correction).

Following the current Pull Back, prices should start moving up again, towards the $428 (March 95) Resistance and beyond.

Long Term overview of €uro Gold Price moves (Updated March 29th)
The chart below shows the Gold price movements in €uros since 1980. As for US$ Gold, price movements have been contained within a downward triangle materialized by the LT Resistance and Support lines.

€uro Gold prices broke out of their Downward triangle in December, 1999, similarly to US$ prices, but two years ahead of them. Currently, prices are contained in an upward channel, similar to the US$ current up channel

Medium Term :

US$ Gold Medium Term Analysis (Updated March 29th)

Because of €uro/US$ fluctuations, the US$ Gold uptrend only started in March of 2001, but also resulted in an uptrend price channel.

Following the violent Dec. 2002 - Feb 2003 upsurge, prices have been consolidating towards the Medium Term channel support line. As long as the US$ Gold Medium Term Support line is not broken, Gold prices will remain in the 2 year old uptrend pattern. 
That Medium Term Support line is currently (3/28/03) at $326.50, and rising by about $0.80 per week, or $ 3.50 a Month. The Resistance line is currently at $371.50 and will reach the $390 level by early August.
March 21st update : Prices are now sitting right on the Medium Term support line. That line is likely to hold, as we will see in the short term analysis below, and prices are now expected to bounce back up again, towards the MT Resistance Line, and possibly beyond, as that Resistance has already been challenged in late January.
March 29th update : The MT support has held, as expected. However, prices seem to be in a "holding pattern" at this time (see Short Term Analysis below), as the reversal has not been swift. Next week moves should be decisive for April prices and beyond.

€uro Gold Medium Term Analysis (Updated March 29th)
This «Euro Gold» Medium Term Monthly chart shows the overall uptrend that started in September of 99 and resulted in a nice price channel. This chart is most interesting in terms of Technical Analysis, as you will see :

Although the overall movement was definitely upward since 1999, price corrections occur each time prices have had a sharp surge and reached the main Channel Resistance or the Horizontal Resistance lines. Likewise, each time prices had reached the channel support line, they bounced back up again. Note how recent Tops are incredibly linked to previous ones (Technical Analysis Support/Resistance theory verified)

According to this chart, prices should have a Medium Term reversal upward in the very near future, with a Medium Term target at around €380 (US$410), where they will face a 1993 Resistance, as well as the Channel Resistance that will need to be "worked" before they can be overcome.
The current Short Term €uro target price is now likely to be the € 304 range (US$320-325), as it is the current value of the next support line.
March 21 update : Please note that this is a Monthly chart, and that conclusions cannot be drawn on the MT support having been broken, as the Month is not over. Should the €uro price of Gold Close below the MT support line as they are now, that support will then have effectively been broken.
March 29th update : Unless Gold prices surge to €313, and/or €uro tanks against the US$, on Monday (last day of the Month), the 2 year old MT support line will have been broken on close. That was quite unexpected.


Short Term :

US$ Gold Short Term Analysis (Updated March 29th)
Following the recent increases since the $310 levels in October, 2002, until Feb. 4, 2003, US$ Gold prices are currently consolidating before the next Medium Term up move.
The chart below shows the current target Price areas according to support lines and Elliott Wave techniques :

According to the Elliott Wave theory, consolidations happen in 3 waves : (A, B and C on the chart). A and C waves are made of 5 sub waves (1, 2, 3, 4, 5), and B waves are made of 3 sub-waves (a, b, c).
Currently (end of March), we would be at the end of the 5 sub-wave, that should end the end of the C wave. After the 5 sub-wave will be done with, the C wave will be over, and so will the current Medium Term price Correction.
March 18th Update : Intermediate supports at $342 and $339 have been broken during the C-3 sub-wave and prices seem to have completed the C-4, opening the door for the C-5, the last sub-wave of the A, B, C correction that has taken place. Prices are now likely to reach the main Elliott Wave target Price, in the US$325-330 area, before bouncing back up again.
March 21st Update : The $ 322 ST support is now likely for the end of the correction, as it corresponds with the €uro Prices support mentioned above.
March 29th Update : Unexpectedly, prices have formed a Symmetrical Triangle during the past week. This figure usually shows indecision before a continuation of the trend... Being located at the bottom of a Medium Term downtrend, and just above the MT channel support , that triangle could possibly signal further decline in US$ Gold prices, which would result in the breakout of the Medium Term Channel support. This would be in contradiction with the €uro prices forecast below. The coming week should be decisive for future price moves.

€uro Gold Short Term Analysis (Updated March 29th)
Following the recent increases since the 305 €uros in late July, 2002, prices have been consolidating.
The chart below shows the current target Price areas according to support lines.

The next probable target price is likely to be the € 300-305 area (US$325-330), as the channel Support line did not hold. The next support would be the 18 Month old support line at €305 (US$327 - $330). This would be consistent with the US$ Short Term analysis. Of course, the €uro / US$ rate itself can (and does) fluctuate, making the €uro 305 support the probable final target of the current consolidation.
March 21st update : The MT Support line has been broken again, as expected earlier, and prices should go further down, towards the € 304 August 2002 Support.
March 29th Update : Contrary to the US$ ST analysis above, €uro prices formed a falling wedge during the past week, which is a bullish sign following a downtrend. However, prices they did not reach the €304 support previously expected. As the end of the triangle is near, prices could now break the triangle (upward) at any time, and therefore complete the expected reversal of the Medium Term downtrend.

S&P500 Long Term Outlook

The chart below shows the Long Term target Price for the S&P500 according to the Head and Shoulders pattern and price target calculation techniques.

The S&P500 completed and confirmed a Head and Shoulder figure that had started back in 1998, when prices broke the Neckline in July, 2002, as show on the graph. Since the Breakout point, as often seen, there has been Pull backs towards the Neckline.
The Head & Shoulders Neckline was at 943 points when it was broken, and the Head had been at 1,500+ points. A further 550 points (1,500-943) slide is therefore to be expected on the S&P500 during the next few years, (similar to what price moves have been on the Nikkei), which would take the index back to its 1991 levels, at about 350 points.
March 29th update : During the last few Month, another Bearish pattern has appeared on the S&P Index : A Descending Triangle. Prices are now expected to go down again, through the Descending Triangle support.
Dow Jones Long Term Outlook
The chart below is a Long Term graph of the Dow Jones Industrial Average. It shows a major risk for the index to confirm the same figure as the S&P500, with a Head and Shoulders pattern.

As this chart shows, contrary to the S&P500, the Down Jones Industrial Average has not (yet) confirmed the Head and Shoulders figure. However, since July 2002, the Dow has started another (shorter term) bearish figure : A Descending Triangle. The target price for that figure is roughly 1,500 points below the Triangle support (Size of the triangle open side taken from the breakout point). 
This would confirm the Head & Shoulders figure on the Dow within a few weeks. Should the 7,300 level indeed be broken, the Dow Jones Industrial will also be in a very dangerous position, as it would confirm a Head and Shoulders figure, similar to the S&P500 in July 2002. Should that happen, the Long Term target price would be the 3,000 points area (Neckline value at breakout point, minus Neckline to Head «A» range). As for the S&P500, this would correspond to the 1991 value of the Dow.

Not Possible ?     Think twice !

Have a look at he charts below :

In 1932, following the 1929 crash, the Dow Jones Industrial Average broke its 1917 / 1921 Supports as if they didn't exist. Prices went down as low as the 1903 support level, before slowly starting to recover in the mid 30's. It took until the end of 1954 before the Dow came back to its 1929 level.

More recently, the Nikkei broke in 2002 its 1980 Support, following a painful 12 year long correction that does not even look like it is over yet. It had broken the Head & Shoulder Neckline in March 92, at 19,343 points (Down 80% from 38,950 in January 1990).
During the last week of March, 2003, the Nikkei was as low as 7,825, another long term record Low...

Further corrections to be expected
So, further corrections in the equities Markets cannot be discarded, and are in fact to be expected to take place during the next few month - probably years - as demonstrated by previous similar graphical configurations.
On a fundamental point of view, not much is to be expected either : The US economy is sinking into recession, unemployment is rising and consumer confidence is decreasing month after month, corporate investments are at a stand still and Europe is soon to follow the US into recession as well. Latest Iraq and middle East situations seem to be making the situation even worse.

Long Term Gold Price Projections :

The Chart below is a Long Term Gold price projection, calculated and graphed according to Elliott Wave and Support/Resistance rules.

This chart shows projected Target Price levels from $420 to $437 for late 2003 / early 2004, consistent with earlier price tops (resistances) going as far back as 1993.
The size and shape of the projected «5» wave are consistent with the height and shape of the «1» and « 3» waves on the chart. (Wave « 5» is equal to wave «1», starting from the bottom of wave «4»).
The «1» to «5» waves shown on this graph would in fact be the first sub-waves of a Long-Long term «I» up wave that will have followed the 24 year long price correction Gold has incurred since its January 1980 all time high.
Therefore, the August 1999 - Early 2004 «I» Wave would only be the beginning of a Very Long Term «I» to «V» up move.

Conclusions

In technical analysis terms, Gold has just started a long term uptrend.
As of March, 2003, a Medium Term correction has taken place. It should be over soon (April).

In the mean time, Stock indexes have confirmed Long Term reversal figures, from their previous almost 10 year non-stop up moves. Long Term Down trends on Stocks are therefore to be expected, that could possibly take them back to their 1991 levels, and even possibly further down, as it has been the case in the past with the Dow and is still presently the case with the Nikkei.

On March 10th, 2003, the Nasdaq celebrated its 3 year, 75% losses Bear Market anniversary, with yet another 2% Loss...

We have also seen that Gold Prices and Stock Indices move in opposite directions.
These observations, added to the particular Fundamental factors concerning Gold, confirm the probability of a significant Long Term Gold price increase.

Patrick H Verbeeck

AnyGoldNow

3 April 2003

10 karat gold is 41.7% pure gold.