GOLD, ELASTIC BANDS
Victor Hugo
There are two main views out there on the prospects of Gold from now to year-end. The one that has become fashionable is that the Gold run is over. Now that the Gold price has fallen -- and now that Mr. Greenspan is warning markets that interest rates will have to rise at some time.
Investors look at the big rises since April 2001 from $255.95 [London p.m. close] to $385.00 in February 2003 and the succeeding big run from April 2003 from $319.75, to January 2004's peak at $428.20.
Well, well, they say - "It is time to give some back - a correction is due .... the party could not go on for ever."
Analysts argue for a long and big selling ( down) scenario next -- because of volatility since January 2004's peak, as well as loss of 6 month upward momentum -- as well as plausible fundamental reasons why the gold run is over. Such as the belief that interest rate rises in the US can be managed carefully enough so as not to damage growth and confidence; such as that neither deflation nor inflation are serious issues; such as that the global financial system is secure. All looks well again.
This camp expects scope for more gold selling and for more work lower to between $372 and $343 -- with the US$ generally stable or stronger from here. Investors are beginning to think about the impact of a few months of delay on performance of their gold shares compared to what they can do with their money elsewhere. Some are even thinking about multi- year reversal risk. Too long for even the most patient of gold investors.
These gold skeptics have already sold some of their precious metal shares and run -- or are about to do so. Only after a retreat much lower or lasting a few months -- or if they should begin to see new threats to the global financial system -- would they be persuaded that any prospect of a real gold run to the above $600 area is attainable.
The other bullish scenario is a gold price of above $500 this year and above $600 by 2006. I can hear screams of derision. Well this implausible scenario is still my preferred candidate on technical evidence as macro relativity and long term cycles are taken into account. On this scenario, the US doesn't overcome their debt problems soon enough to avoid an asset bubble pop. The pop comes - which impacts on the US$, stock markets, property and bond prices all over the world. It doesn't matter too much whether the trigger comes from some of the biggest geopolitical and large scale terrorism risk of all time -- a time when confidence is shaky -- or whether it comes from the realisation that the US$, US Treasury Bonds, Wall Street and US property prices are inflated and ripe for a puncture or a blowout.
The main problem the US has, is that the fundamentals ( not just consumption patterns) needed to keep US asset prices strong are not there. Not when you look at US public and private debt and their trade deficit. Not when you look at the Asian value- for- money production and work ethic. Not when you look at the already established pattern of gradual disinvestment from Wall Street and US Treasury Bonds and the gradual shift of investment to Japan, China and even to the more respectable emerging resource markets, such as South Africa.
Whatever Mr Greenspan says about deflation being no longer an issue as before -- and his lack of concern on inflation, the ordinary US consumer is already noticing significant price inflation. You need only talk to an average American. Oil prices are not helping.
There is no way that the US consumer can expect growth and recovery to be sustained if interest rates have to rise - however gently and intelligently applied. Especially now that China, which is the other growing global consumer - is putting the brakes on growth and borrowing. As Absa Treasury economist Chris Hart points out -- Japan also has to stop supporting the US$ as Japan's 10 Year Bond yield rises.
After the super stimulation efforts of the last two years, the US and global economy should be booming, not having to be reassured by manipulated US retail sales and jobs figures. Mr Greenspan and team have to kick for touch as long as they can - in the hope that time brings new solutions -- before raising borrowing costs. Election year as well. Yet I think that the Fed's worries are more serious than the need to assist Mr Bush.
As I have said so often before - the main factor for the medium and long-term prospects for gold is the US$ and what drives it. I look at the Euro and the US$ Index. Both are still showing strong momentum and cycle evidence that the dollar is merely taking a breather before resuming its downhill trend towards typical swing candidates that still show scope for another 15% or more lower in the next year -- and perhaps still weaker after that.
One needn't go into detailed, complex analysis of analysis of analysis to recognize the direction of the six-month and one year US$ trend, despite the bit of relief in recent weeks. Meanwhile much of the world is getting into the habit of criticising the US and are looking for ways to dislodge its role as global policeman and leader.
Until the US produces more, sells more, spends less, pays down debt and consumes on growth earned rather than on debt -- and perhaps finds new ways to win friends, destroy enemies and to influence people -- the global financial system has a problem. Years of investment flows to the US, reducing US production, increasing spending -- and flamboyant consumer patterns -- have caused distortions. The imbalances will take time to clean out and have to be cleaned out before the US$ can recover on a sustained basis. Until then, any shock to the system, even gradually increased interest rates -- can set off chains of dominoes.
That is what the huge increases in recent years of the $Gold price, precious metals and other commodity prices have been saying. The US$ or Gold wins. Many people out there have been expecting Gold to win and still do. Unfortunately though, if gold wins -- the world can expect a lot of turbulence financially and eventually militarily.
Perhaps the win/ lose analogy is not watertight though. A further rush to gold and other commodities -- as Asian growth continues and financial shocks are dealt with -- may only last a few years such as in the 1970's. Either way, South Africa is well positioned for the growth that will happen around a resources run. Assuming a gentle global financial adjustment phase -- Asia can fuel huge demand for SA's resources, goods and services.
It is quite normal for huge gold price up moves to be followed by a return to equilibrium or even to overshoot before going back to the middle of trend ranges. For instance on $Gold -- a simple 1.0 standard deviation channel range drawn from the end of the 19 year bear market in 1999 -- shows the middle of the range at about $372 and an overshoot at about $342. So no need yet for gold bulls to get too doomish and gloomish about the range $372 to the current $394.50. Expect a bit more probing of support at $388 or at other support candidates e.g. at about $381 ( where there is another key gradient ). Many a trader will agree that like a rubber elastic band, buyers can again take the price quickly higher from the current area to probe the $430 area or higher-- as they fear the risk of "missing the boat " -- or gain confidence in the long term gold bull. The last one in the 70's continued for 12 years. We have only had four this time. Much will depend on the next few weeks according to the cycle signature. About every four years is also a candidate for a lengthy pause and pullback.
Short term cycle and seasonal scenarios are actually looking good for a powerful run to start between now and about 4th May all the way to June or beyond. A rally on $Gold and precious metal prices in May could also turn out to be a chance for gold share holders to sell into. For those who don't want to risk several months of setback as would happen with the gold price back to e.g. $342. And there is a count scenario warning to use forthcoming rallies to get out in. Too soon to call that strategy though. There would first have to be some persuasive macro or technical support breaks or cycle set-up changes to convince that the gold bull may be dead for the year, other than a last gasp rally next.
Remember in January I called the momentum swing counts above $500 by the end of 2004? I think this is still on track. Because of the sequences of swings and alternate cycle scenarios, one of the most important indicators will be whether there are more than 2 consecutive days above or below $392 after 30 April.
The Euro trending towards and above 1.225 again may also be a key indicator. If stronger - watch the propensity to stay under 1.180 and the behaviour near the 1.120 support area if the Euro weakens more. A stronger US$ could spell some months of delay for the gold bulls.
On the plus side, a small interest rate rise sooner than the market expects (most expect August), could well send a message that inflation is more of a problem than the Fed admits. The gold price could then run again -- on the view that the higher cost of owning gold as interest rates rise is discounted and that the yellow metal can attract those disillusioned with paper money.
What about gold shares and weary, disillusioned, South African holders? More and more we hear the refrain ...."It's no good, whenever the gold price runs -- the Rand strengthens and the shares do nothing." No, not - as simple as that. When you look at the JSE All Gold Index which reflects the impact of earnings and the Rand and the Gold price -- you can see the scale of support at 1840 to 2015 ( currently at 1922 ). 50 day trend is down, but perhaps near a reaction rally or reversal to up on cycle and support factors.
So if you have not yet bailed out or are in for the long term - it may be useful to hang in there for a while. Aggressive golds investors can start buying for value and range on tight exit parameters, especially now that the Rand is softer. A $Gold price push -- while shares are at value ranges and are technically heavily sold -- could see a swift move up on the JSE All Gold Index, although this has to consolidate or trend above 2480 for prospects of more strength.
What about platinum and silver? Comment in our Turning Point newsletters and Trader's Call services. Come along to our Monthly Capital Club meeting in Sandton on 3rd May 2004 -- where precious metal shares will be discussed - see sites for venue details.
Strategy on the broader market? Time to be very alert. Pockets of divergent momentum indicators across major sector groups and scope for aggressive pullbacks in coming weeks -- make this a defensive market. Stock and range pickers can do okay - as long as they choose their levels to implement diversified buying into sectors already showing near term negative momentum. Cash on hand did not help last year - but this year has its own set of risks and opportunities.
Victor Hugo
www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com
26 April 2004
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