Gold Indexes, the mirror of gold's soul.
Dr. Clive Roffey
I have often written that fundamental analysis is the engine of the market whilst technical analyses are its eyes that mirror the soul of the market.
Although each gold stock has its own fundamentals that lead to the individual chart patterns, compare GG with KGC, there is a group effect that leads to most gold, and silver, stocks following a basic path together. This effect is most easily studied in the analysis of the various gold indexes especially the HUI, GOX, XAU, FT Gold index and JSE Gold index. I would also include ASA in this category in view of the spread of stocks that occur in investment trusts making them small indexes in their own right. Most mutual funds also fit into this index type of category, but for some unknown reason do not appear in most gold stock analyses. Mutual funds can often give excellent pointers to the overall state of the gold stock market. But we are far too myopically involved with the individual stocks in our portfolios to look at other indicators!
I decided to look at a cross-section of the indexes to analyse the gold market. All the charts are taken from the 'bigcharts.com' site and recognition is given to them for producing an excellent free service for chart analysts.
GOX
The monthly chart of the GOX has a very clear flat resistance at the 73 level. This flat resistance formed the neckline of a reverse head and shoulders base pattern that had limited the upside progress of the index for six years. In the middle of last year the index broke decisively upwards through this resistance. The upside count out of this base pattern indicates a minimum target of 122, that is a potential 45% further upside still to come. But there may be short term churning at the current 85 level as the index continues to gather steam to continue its upward thrust. The bottom line is that this chart is extremely bullish for at least the next year. I am well aware that many analysts are talking of gold at $1000 or even up to $3000 that would suggest much higher values on the GOX. My reaction is to take each move in the gold market a step at a time and not to indulge in the 'I told you so' syndrome of expansive forecasting.
HUI
I have included the RSI oscillator with this chart to show the huge buy signal given in mid 2000 as the oscillator set up a classic buy divergence as it refused to mirror the new lows set by the index.
In this case there is the semblance of a reverse head and shoulders but the index has a split neckline, with two resistance levels. Compare this to the flat resistance on the GOX. This shows that the un-hedged stocks in the HUI were outperforming the general gold stocks represented by the GOX. The HUI is a far more powerful chart than the GOX. But, there is always a but, the upside count out of the HUI base pattern has been achieved. However there are no signs of any sell signals and on a simple charting basis whilst the upward trend remains intact, hold onto the shares in this index.
XAU
The next diagram is the popular XAU gold and silver index and the following chart is shown on for the past 18 years. Some analysts believe that such long term charts are not relevant to today's movements. I disagree.
You will note that the price gyrations of the XAU for the past six years are almost identical to those of the GOX. There is a huge reverse head and shoulders with a flat neckline. The XAU has only just broken above this six year resistance level and after the initial breakout has pulled back to test the support level. In most chart books this is defined as a good buying area.
There have been two distinct divergence signals, the sell at the start of 1996 and the buy in late 2000. The classic reverse head and shoulders pattern is visible. But the key to this picture is the huge resistance level at the 150 level that has limited the indexes upside progress since 1985. The target count from the reverse head and shoulders base pattern indicates yet another attack on this long term resistance level. The current minor correction of the past two months is merely a breather aas a precursor to another serious upside move.
FT Gold Index
The FT Gold index is a global gold index as it is composed of South African, North American and Australian stocks. Once again we note the buy divergence from 1997 to late 2000. In addition the reverse head and shoulders base pattern is repeated. There is a long term resistance level that impeded the progress of the index after it broke out of the base pattern. For the past two months the FT Gold index has joined all the other indexes in having a minor correction back to test the breakout from the flat neckline resistance of the pattern. The upside target count out of this base pattern is to at least attack the top of the long term resistance level if not move above it.
JSE Gold index
The JSE Gold index is slightly different due to the Rand / Dollar machinations. But the most interesting aspect of this data is the fact that it has broken above the long term resistance that we have noted on the other indexes. This is an extremely powerful break. Since the April 2002 peak the index has pulled back to test this level that is now acting as a support for further upside progress.
Another interesting aspect of the data is the massive increase in volume that has followed this index. What is interesting about this huge volume increase is that it has been concentrated during the period of the correction. The volume has been split equally between the positive volume in black and negative volume in red. But the two highest volume spikes were positive. I am not a volume expert and cannot draw conclusions, except that if the next upside move is accompanied by even greater volume then it will indicate a huge bull market. But at this time the buyers and sellers are balanced.
There is a down trend line that is governing the short term movement of this index and it will require a move above the 2700 level to trigger the next upside surge.
ASA
ASA has the longest historic data going back to the 1970's massive bull run when it appreciated twelve fold. Its recent upward movement slammed right into the huge resistance level at the 50 level. It will need a push above 50 to trigger the next upside bull phase.
CONCLUSIONS
- Most of the gold indexes gave buy divergence signals in 2000.
- Most of the gold indexes have formed large reverse head and shoulders patterns over the past two years.
- All the indexes have broken out above the reverse head and shoulders patterns.
- For the past two months they have drifted back to test the breakout levels.
- The upside targets out of the reverse head and shoulders base pattern indicates much further upside still to come.
- Several indexes have been governed by long term resistance levels that have been in place for at least 18 years. The current upside potential indicates that these resistances will be tested again in the near future.
- The JSE Gold index is leading the pack in respect of the long term resistances as it has already broken above the resistance and is looking to move up into all time new high ground. The rest will follow.
Dr. Clive Roffey
28 February 2004
chartist@global.co.za
www.shareaction.co.za
Technical Analysis Course : www.charts.co.za
Website analysis : www.utm.co.za
Email : chartist@hotmail.com
Gold Action is a fortnightly commentary on global gold markets produced
by Dr. Clive Roffey who has been a leading independent commentator on
gold markets since 1969.
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