US $, Gold and other Precious Metals
Victor HugoDo the majority of the crowd believe that the US$ can only weaken and precious metals prices in US$ can only go up from here? Probably yes.
Is the motivation to buy precious metals and related shares more than the motivation to sell ? For now - yes - if you assume that higher precious metals and share prices since about 6th February are illustrating this dynamic.
The typical private investor or portfolio manager wants to know where the price of precious metals- linked shares are going. They want performance in the next six months, preferably in the next three months - despite all the holier- than- thou assurances to self and others that they are "investors" not "traders."
Well as the US$ weakens, precious metals in US$ terms push higher. The question we have been asked is whether three- and six-month trends of precious metals are intact and where can we look for significant warnings that a trend turn to down is underway or where there is more corroboration of the 3- 6 month and longer uptrend corroborating its robustness.
Oh yes, we all know that the problem in talking like this is how to measure and define trend and trend expectations and to know what to do. We will talk from a momentum and behavioural count perspective.
The US$ Gold price is trading at $411.30, well up from its 6th February low of $395.00 on Comex spot. Briefly - the uptrend is in place if you use simple moving averages and debatably, other momentum techniques -- and while the US$ Gold price holds above $406.20, on our model.
But from a behavioural count perspective, which attempts to measure and project the way the crowd is believing/expecting about what next, there are some warnings that the current push from the $395.00 area may merely frustrate some eager bulls. For a few days or weeks. I can just hear the bellows of anger if despite the current enthusiasm, prices in the next seven cyclically critical market days settle and slip lower again -- just after most of the sparkling eyed bullies have bought. They would not like another swing down lasting for a few weeks or even months.
They would even be disloyal to flaxen-haired Miss Piggy if the Gold price headed to below $395.00. Swing support at $373.00 is a candidate.
My counts are warning of this scenario on a better than 63% probability basis. On this scenario there would be some consolidation or reversal characteristics wherever the new pivot base range turns out to be -- and only after that would the $Gold price begin another leg up towards technical targets such as $445 and higher. We are on record as calling the US$ Gold price heading to $474 or above $500 by year- end. Notice we do emphasise that a no-dip scenario and jolly good gold-run could signal loudly at $414.60 and each $ above. But also watch the volumes - not looking convincing for an up- run yet. And the US$ has a way of being bought for a while after each erosion phase.
Before dumping all your gold and platinums now -- hoping to catch a precious metals dip -- please appreciate that models are not completely reliable forecasters -- they are just indicators. And models themselves are dynamically giving indications as investors make their choices and decisions. The main value of a model is the degree of objectivity of the indicator.
Fundamentals have probably never been stronger for precious metal prices than now, not only in US$ terms. Currency volatility, fears about hyperinflation sometime down the line, a shift to buying commodities as a hedge against inflation, questions on sustainability of global growth, pressures on the global financial system. Global growth such as it is -- effectively being propped up by the US resorting to debt. Also dynamics happening behind the scenes -- such as the West and Russia and China all jockeying for control of dwindling oil reserves, centred in countries that don't like Western values but want to consume as much as the West. The US$ the world's reserve currency -- steadily eroding its buying power.
I can go on. Fact is though that these issues and their implications -- are becoming understood and expected by the markets. And markets tend to do the opposite of what the crowd expects.
So where does that leave us? Look out pretty carefully for just a few more days before piling into gold and platinum and silver shares and consider selling some in this rally to make cash. Risk is of course - they run while following the major momentum -- despite what the behavioural counts are wqrning about a dip next. Then one has to scrabble in on a rising market and pay more.
But this risk notwithstanding, on balance it could be better to do aggressive buys in dips, if they come. One can hold or accumulate some now if there is a strong push through $414.60 ( so as not to miss the boat). Consider holding some core quality shares to ride dips and major uptrend of the bigger precious metals bull market.
Our cycle readings are still insistent that a 9- or 19 year gold bull market is underway. Setbacks for months at a time or days at a time -- are a buying opportunity. The problem we are talking about is whether a significant dip buying opportunity between now and April is coming ( on one cycle scenario)-- or whether one just climbs aboard/stays aboard big now -- and waits for the rewards.
Although a buy- and- hold strategy sounds a bit cowboyish -- remember that one of the most prevalent wails of anguish during the last big gold run in the 1970's when the gold price went to $850 an ounce and shares increased e.g. tenfold -- was ..."If only I had not got out....I was too greedy to protect profits."
Then of course there are those who never saw money in the bank -- only on paper. They never took profits.
Of course a combination is best -- but whatever route you choose, keep an eye on the technicals. They tend to reflect the trend quite well.
One of our subscribers had $8m in gold and silver shares -- until first week in January. He is looking after profits built for years. He is hanging in with half and as a precautionary measure has recently sold half to make some cash. Now he sits pretty - he has cash to buy his favourite shares perhaps 25% lower in the next two months if a setback comes -- and if a run develops - he can still get aboard in minor dips without too much damage. If the applecart tumbles or if macro fundamentals change to support the US$ and stop supporting golds and silver - he can get out of more holdings. Good luck Joe. May Miss Piggy deliver her rewards in time.
For investors in South African gold mines - the Rand is likely to work stronger in 2004 - as discussed in our newsletters. !0% stronger? To ZAR$ 5.40? However big the move -- most investors don't really expect the Rand more than maybe 10% stronger than current levels. A 10-15% currency handicap to SA gold shares should not be a train smash for them. The important thing still to fuel SA gold shares, is the slowly accelerating interest in new mine development in a rising gold price environment. Exploration and new mine development has been on hold for a good ten years.
Assume that the $Gold price -- after dips -- is headed to $475 and then to the $615 to $840 area in the next couple of years. On that scenario -- you can see why I say buy gold shares in the dips and even buy some on breakouts.
Until trend shows otherwise on more tests, a dip on precious metals and the ZAR$ Gold price is slightly favoured on my reading of techncial dynamics for the next two months or so. The comments above should provide some pointers to strategy. If a run starts despite the technicals, we alos know what to do!
We are watching our key levels and progress towards them on $Silver and $Platinum as well. Levels to suggest forthcoming direction -- are at $6.88 and $6.20 on $Silver. One count scenario for the next year -- $8.30 resistance. On $Platinum - key levels are at $855 and $817. A count scenario for the next year -- $1093 to $1233!!
Also keep an eye on these precious metals in Euro terms: if trend maintains technically -- this would be an indicator of fundamental buying pressure and the long term bull -- not merely a reaction to US$ weakness.
Again, the bigger trend for Silver and Platinum is up - but wouldn't a dip be useful?
If you would like to see a short term $Gold count scenario on a graph - have a look at www.HugoCapital.com/strategy/
12 February 2004
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