Dr. Clive Roffey
As I write this newsletter we have in South Africa a road show from the New York based CPM group that, on their website, claim to be the world's leading precious metal analysts. They are trying to convince our local gold miners and financial houses that there is no immediate prospect in gold and that it is likely to move sideways for the foreseeable future. I have always distrusted any analyst or group of analysts that attempt to forecast the gold price in isolation without comparing it to the performance of the shares and global gold indexes.
When one analyses the share price movement there is no way that this gold bullion run has come to an end. In fact it has not even moved out of first gear!!
I apologise to readers for the fact that I failed to report and act on the very obvious divergence and oscillator sell signals that detailed the top of both the gold and silver markets in January. The reason for this was that I only expected a minor correction. This was not the case. We had a sharp correction. In future I shall report all the signals and leave it up to readers to decide what action to take. But having said that I must refer back to the last issue, in which I stated that if you had never bought a gold stock, now was the time to rectify that error.
It is essential to maintain an overall perspective on the precious metals and their stock prices. Yes we have had a nasty sell off in a typical Elliott killer C wave. This downside drop has squeezed every last ounce of blood out of the gold shares to shake out all the weak holders. Gold stocks are back in the hands of strong investors. But the long term data on the gold stocks indicates that they, like the bullion price, have not yet changed into top gear. I maintain that this is only the first phase of a major long term bull market that has large price and time moves ahead. This is not a market that is going to suddenly fizzle out in a couple of months. It is at least a three year bull with possibly even a further five years to go before we run into a major peak.
The potential strength of this gold market is amply illustrated in the long term data on DROOY. This stock has been locked inside a trading pattern for the past seven years. Although there have been some strong price swings the main upside trend has not yet started. All the data on DROOY indicates that the new major bull trend is about to start. There is not a cat's chance in Hades of DROOY moving upside to the price levels I anticipate without a commensurate move in the gold price. A similar set of charts is shown by Goldfields, as well as Harmony and Anglogold. As I stated in the last issue "Gird your loins and pluck up courage. The precious metal stocks have been sold off to levels of stupidity and are into major buying regions. It does not matter if we miss the bottom by a couple of weeks. In six months time you will be wondering what all the May panic was about."
The dollar became the lynch pin of the international monetary system as a result of the 1944 Bretton Woods Agreement. Since then it has been the dominant global commercial and investment currency. But the outlandish trade deficit and general monetary wobbles in the US fiscal system, coupled with the terrorist syndrome has led to a global loss of confidence in the dollar as the true asset of last resort. In addition the recent oil price rise has loosed the spectre of inflation and exacerbated the discontent. This has led to a general evacuation of international money from the dollar.
Since its low against the dollar in 2001 Sterling has out performed the US currency by some 35%. Compare this to the Euro's gain of around 50% and the Swiss Franc's appreciation of some 45%. Even the Yen with the beleaguered Japanese economy has gained 23% against the greenback. It appears that every leading currency in the world has been preferred to the dollar for the past three years.
Although the dollar price of gold is the standard method of assessing the yellow metal's price I believe that it has limited use in determining the real value of bullion. For gold to assume the dominant role as the world's leading asset of last resort it must have better prospects and data than all currencies. There must be pressure from the investment community to prefer gold to all forms of fiat paper.
So what is this fetish of blindly analysing the gold price in US dollars? Under current circumstances I believe it is essential to analyse the gold and silver prices against all the leading currencies to obtain a realistic picture. In addition I consider it necessary to compare the performance of the precious metals and their shares against the leading global equity indexes in order to gauge realistic investment performance and expectations. So let's start!!
Before charging into the analysis it is essential to realize that any gold price is in fact a relative strength comparison. A rising gold price in dollars in effect means that gold is stronger relative to the dollar whilst a falling price implies that it is the weaker of the two entities. Gold price analysis is not an absolute study, it is an analysis of relatives.
This is the chart of the gold price in Euros. I have marked every grouped oscillator buy and sell signal and find it to be astounding that this technique gave every serious trend change. When the oscillators group together at the top of the chart they flash a sell signal and a grouping at the bottom indicates a buying area. Whilst they remain separated the trend remains intact. Last week the data gave a buy signal for the gold price in Euros.
Since its inception the Euro has been range bound against gold. It has hit E345 six times during the last two years. This is a strong resistance level. The current buy signal indicates that the gold price in Euros is ready to again attack the E345 level. But this is not all. I would expect to see this resistance broken by the next gold price surge. Any break above E345 will signal an exceptionally strong gold market that will out perform all currencies.
The sterling price of gold bottomed in 1999 and since then gold has outperformed the UK currency. The chart shows that there is a huge resistance level at 235 pounds. Four times during the past year the price has attempted to break above this overhead selling level. Each time it has been repulsed. As the bull trend remains intact I must look for the next upside surge in bullion to attack the 235 pound level, and in all probability to break above. The uptrend remains intact and there is strong short term support at 210 ponds that I would not like to see broken. At the moment I am happy with this data.
The gold price in Yen has rocketed. This was to be expected in view of the Japanese domestic economic problems. But the key aspect of this data once again is the critical overhead selling resistance. During the past ten years the gold price has hit this level 8 times and been repulsed. For the past 18 months the Yen gold price has been brewing up a serious support area just underneath the resistance. One of them has to back off in the near future. This is probably the most sensitive and critical of all the gold currency charts. I use this as my early warning leader. A move above the 45 000 Yen level per ounce would be a major upside break but a drop under 40 000 Yen a serious break on the downside. Watch this chart very closely.
Finally I come to the last major international currency chart of gold. I have detailed this chart on numerous occasions and always refer back to this data in times of stress. This is the long term chart that keeps me sane. The price of gold in Swiss Francs is the key to unlocking the gold market. I have previously detailed that the Swiss Franc is not a currency for the settlement of trading debt. It is not a commercial currency; it is the world's ultimate investment currency.
This is an extremely powerful piece of data. There is a huge head and shoulders bottom reversal. Gold has out performed the Swiss Franc for the past five years. If the neckline at 540SF is again penetrated then I would look for a surge in the gold price.
I have often asked you to postulate what on earth will drive a non interest bearing yellow metal to out perform the world's leading investment currency? It could be deficits, or terrorism, or oil, or currency collapse, or economic stagnation, or rampant inflation, or any combination. I am not even interested in speculating on the reasons why. All I am interested in is the breakout signal since this will imply that gold will accelerate away from all the world's leading currencies.
It is essential to analyse the gold price in Rands as this determines to a large extent the earnings of the South African gold mines. The downtrend that started in late 2001 remains intact. But there has been consistent support for the price at around R2500 per ounce. The most interesting aspect of this chart is the falling wedge pattern that has been mapped out since the start of this year. The daily data has given a grouped oscillator buy signal and I must look for a major reversal out of this pattern in the near future. A move above R2750 per ounce will have a dramatically bullish impact on gold mine earnings.
The rest of this analysis is reserved for paid subscribers.
Dr. Clive Roffey
30 May 2004
chartist@global.co.za
www.shareaction.co.za
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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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