Elliott Wave Patterns of the AMEX Oil Index (XOI)
Confirm a Coming Advance in Gold Stocks
This article examines the current wave structure in the XOI and how it is suggestive of gold stocks advancing in the coming month.
XOI Elliott Wave Structure
The first chart shows the daily XOI cash index since 1992. There was an impulsive wave running from 1992 until nearly midway through 1998, a run lasting five and a half years yielding a 150% return. Since 1998 the XOI has been in a complex correction with a flat structure. The current wave down is a terminal impulse of Primary degree. Fifth waves and C wave structures that have a five wave structure with an internal three wave count are referred to as terminal impulses. The purple line shows resistance at the base of wave (4) at around 370-390. Since wave II is complex, it is highly suggestive that wave III will be the extended wave in the pattern. The extended wave is a minimum of 161.8% of the longest wave in the impulsive pattern. With what the chart illustrates, we should expect wave III to minimally carry the index up to a cash value of 800-850 during the next five years.
The third chart shows Bollinger Bands, ADX and MACD of the XOI. The middle Bollinger Band (MBB) (also the 50 day MA here) currently represents overhead resistance. The 25 day MA appears to be nearing a crossover which is bullish. The MACD show a long support trend-line extending back to August of 2002, which is also bullish. Stochastics set at 14,4,5, and 4,3,3 both show a pullback in the next while before a further advancement.
All three charts show longer term strength for the XOI, but short term weakness during the next two to three weeks.
Current HUI Elliott Wave Structure
The current Elliott Wave structure of the HUI represents wave C of either (4) or (X), which appears to be forming an ascending triangle. The preferred structure is shown in color and the alternate in circled grey. Both point to the HUI going to 105 to 110 prior to the next leg up in the structure, based on internal Fibonacci relationships of both the preferred and alternate. Both have acceptable labeling probabilities, so either count is valid at this point.
The RSI on the HUI and other gold stocks appear to be going down to touch the 30 line again prior to advancement.
Summary
Commodities tend to move as a group which is what we have witnessed this past two years. Most commodities bottomed in 1998 to 2000 prior to the markets peaking in March 2000. A lot of people are comparing the current situation to that of the 1970's: stock market drop, higher oil prices. There are a number of important differences that make our current scenario more severe.
Ever since the US completely went off of the gold standard in 1971, inflation has increased dramatically driving gasoline from 38 cents/gallon in the 70's to $1.70/gallon as of late. A geologist named Hubbert in 1956 observed that oil production followed a bell shaped curve in any region. This lead him to conclude that global oil production should peak in 2004, and gradually decline. Oil topped out recently at $39.99/barrel, only to fall below $30/barrel. A lot of people think they will be blessed with $12/barrel oil again…..unfortunately that was prior in the bottoming of most commodities bear markets. Once this war is quickly over, people will wake up to the fact that the US has its lowest oil supply in 28 years, they require importing 60% of their energy. Oil stocks have been relatively un-phased by the rise and fall of oil prices the past month ie. Imperial Oil has had a trading range of $43-47/share in Canadian funds. As shown on the Elliott wave charts of the XOI, oil stocks have had a corrective pattern since 1998 which is nearing completion. Higher oil prices generally spell economic slowdowns which tends to move the price of gold. Using the XOI as a canary in the coal mine for the general direction of commodities has seen a flock of canaries to come out of the coal mine. If the future prices of oil are any indication, the move up for gold should be explosive.
The cheap oil prices over the last decade caused North Americans to park their fuel efficient tin cans and move on over to SUV's which drink gas by the mile. Now with higher oil prices, this is putting a huge chunk of the GDP at risk. In Canada, the automotive industry accounts for 20% of the GDP. All North American car manufacturers have had to lure people to take them off their lots with 0% financing, and other rebates. Ford was losing an average of $2000/vehicle in the process. The fact that the auto sector has saturated their market is crippling, coupled to the fact higher oil prices are here to stay. The automotive engineers are always 2-3 years behind the trend. Currently they are still selling big SUV's for people who want to haul a yacht behind them when they should be focusing on smaller, lighter fuel efficient cars. Asian auto makers have focused on this area, and are cleaning up in the market right now (ever try to get 0% financing at a Honda or Toyota dealership?).
Oil is the fuel for an economy. No oil means no economy, so it is required at all times. Gold on the other hand has been viewed as something that is only needed to place on jewelry or industrial applications. As of 1998, gold consumption was as follows:
Jewelry 66%
Industrial 13%
Investment 10%
Other 11%
India, the worlds largest consumer of gold has had sales of gold jewelry (which accounts for 85% of Indian gold demand) plummet due to price volatility. Jewelry demand accounts for 700-1000 tonnes/year of the gold deficit currently. There are only 135,000 tonnes of gold that have been brought to the surface by humans, and 2-3000 tonnes that are mined annually. Currently, the global demand requires 4.5-5 tonnes/year which creates a yearly deficit of 1500 tonnes. Even if global jewelry demand were to fall significantly, there still is a deficit, and the only way to increase supply is to increase production. The average global cost for break-even production costs for mining gold is around $300 USD/ounce. The twenty two year bear market has removed all non-profitable players, and caused a tailing off in production the past decade. Having significantly higher gold prices in the future does not mean the supply can be met overnight. It is estimated there will be a 4-5 year lag in the ability to get global mining capacity to meet the global demand.
Both the worlds oil and gold supplies are in short supply currently with increasing demand The thought of the war being over fast brings hope for North Americans of lower oil prices which will pave the way to an economic recovery. No one is really factoring in the amount of oil that will be consumed by China or India. Due to the cheaper cost base in Asia, most North American companies have relocated at least a portion of their company to being run somewhere in Asia. Over the past two decades, any profits the Chinese government has made has been rolled back into the countries infrastructure. This has spurred economic growth which requires more oil. The US is now in competition with India and China for oil. Oil wells and refineries have been running at full capacity, so any shortfalls along the way will be felt. Gold is also being purchased on the open market by China, who want to boost their gold reserves for economic diversification.
Investment demand for gold will be one of the primary drivers for gold during the next decade. Paper has been able to control the direction of price of commodities, but a supply imbalance cannot be met by fancy paper transactions. A revival of the gold standard will soon be embraced by countries with fiat currencies reduced to nothing. In earlier economic periods, people could simply rotate into other currencies for capital preservation against devaluation. The economy of today however is globally linked, with a cold being caught by everyone. With the Japanese Yen on life support, the young Euro on the dole, and the USD on death row, there is not really one global currency that can currently replace the above as a new replacement, except gold. Once countries adopt a gold standard policy, this should bring about a good base for the next phase of global growth once we pass through this bear market phase by 2008-2010.
This article has shown that commodities tend to move as a group, with specific examination of the XOI and HUI as proxies for oil and gold, respectively. Their stock patterns are suggestive of a strong advance in the coming years.
Any comments or flames can be directed to dave@chartlook.com
David Petch
24 March 2003
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