The overwhelming opinion in South Africa continues to be that the rand will strengthen to at least R5.50 on the back of a weakening dollar. The technical data refuses to confirm this assumption. This week's move back above R6 indicates that a period of stability or weakness is likely. The Euro / Rand chart is particularly vulnerable. When the Rand strengthens it does so against all the major currencies. There is no vacillation between its performances against the individual currencies. When the Rand weakens it does so against all the currencies.

The Dow is looking extremely vulnerable and by are the other leading global markets. At the start of the year the Dow was around 10 800. Since then we have had good first and second quarter company reports. According to Greenspan the US economy is roaring ahead and inflation is under control. So why is the Dow some 800 points down!!! It has now crashed under the critical psychological 10 000 level. All the technical data on global equity markets looks ready to crack into a nasty bear trend. This will take out all the recent lows and attack the previous 7 200 low on the Dow.

There appears to be a misconception that gold only reacts to a weak dollar. There are numerous reasons for gold to move, apart from the currency angle. Inflation based on rising US interest rates and an oil price of $50 per barrel is one to be considered but I believe that the most powerful motivation for bullion to move is based on the Dow. If, as I believe, the Dow is ready to crack downside big time then investors will be looking for defensive positions and gold is the traditional asset of last resort for nervous investors. The bullion price continues to out perform all the leading currencies, including the investment currency, the Swiss Franc. A move by the Dow to well under 10 000 in my opinion will lead to a charge into gold.

I have continuously detailed that most of the gold stocks have falling wedges and other dynamic base patterns that have accumulated since the end of April. I continue to rate the past three months as a base building exercise as a precursor to a dynamic vicious upside swing that will more than compensate for the bitten nails of the past three months. This is NOT a selling area for gold stocks.

I again detail my point and figure chart of the Rand. This data shows every intraday move of 2c in the dollar/rand relationship. The plunge in the Rand down to its low of R5,86 was the final sell off. Since then the chart has mapped out a reverse head and shoulders pattern with the neckline at R6.12. Friday's move above this to R6.21 should trigger further weakness to R6.35. At that level I expect resistance but if, after a correction from R6,35, the Rand goes back above 6,35 I must look for R6.75 as the target level. I have continuously analyzed that the Rand was in a base area not a new bull trend. I look for a weaker currency going forward.

The Rand gold price is the key to the gold share market. For the past three months I have continuously detailed that the chart was mapping out a falling wedge. I further detailed that once complete the upside catapult would be vicious. I believe that we have seen the bottom of the Rand price of gold around the R2370 level. The upside count out of this data is to R3200. That will set this gold share market alight. I expect a vicious trend reversal to confound all the negative analysts and mesmerize all the panic sellers who were shaken out of the gold market over the past three months. Sure it is difficult to have to work through large base patterns of this type but the resultant reversal is well worth the wait.

Cast your mind back to the heady days of 2002 when gold shares went on the charge for the fist six months of that year. It was a dead cert call that the Rand was going to fall to R20, the government had no idea of what they were doing, the economy was in ruins and every man and his dog knew that gold shares were the only place to invest. I was roundly criticized for sticking to my guns and advising investors to take profits. During this free for all every gold analysts who had never been heard of suddenly appeared out of the woodwork with prognostications of a dead cert move by bullion to a minimum of $600 and many to well above $3000. There was an unabated buying euphoria.

For the past four months every man and his dog has some cast iron inside information that the Rand will definitely strengthen to R5,50, and some Rand watchers to R4.00. The gold price is seen as static and going nowhere and thus the combination of a strong Rand and flat dollar gold price will automatically lead to a falling Rand price of gold. This will cause the mines to lose oodles of boodle and they will have to close. I cannot tell you how many times during the past 35 years in the market I have heard that the mines will have to close. Durban Deep, the most marginal gold mine has been in operation for the past 120 years, and is still going. Come on all you doomsday analysts, please tell me how many gold mines have closed over the past twenty years and how many NEW ones have opened!!!

We have witnessed a selling panic that is so traditional at the END of a corrective phase. New bull markets begin in doubt and end in euphoria.

For the past two years the JSE Gold Index above has been locked inside a classic flag pattern. The index has hit the lows of the bottom trend line and started to reverse. Although the trend of the flag is downwards it is in fact an extremely bullish pattern. The old stock market adage is that the flag flies at half mast and once the flag has completed it will lead to another upside charge of a similar size to that which occurred into the flag.

To obtain a full understanding of the importance of this pattern it is essential to consider the basic Elliott wave format of the five wave move for a bull market.

The JSE Gold index bottomed out in October 2000 and started the first leg of the classic Elliott five wave bull market move. This first leg topped out in April 2002. Since then the index has mapped out a typical flag pattern as wave 2 of the format. The past three months have resulted in a classic panic sell off at the end of the correction when the sun will never again rise on the gold market.

We take a line across the bottoms and draw in the parallel across the April 2002 top. The slope of the first bull leg is then reproduced at the end of wave 2 to give an upside projection of the potential upside for wave 3. It is an absolute pre-requisite of Elliott wave analysis that wave 3 MUST go well above the top of wave 1.

In our case the upside potential is for the index, currently at around 1500 to go to 7500 around the first six months of 2006. In other words this implies a 500% capital appreciation potential in the next two years.

I have continuously detailed during the difficult days of the sell off during he past three months that the gold market slide was the end of an old correction NOT the beginning of a new bear trend.

It is my contention that we have started the reversal into the new bull trend that will become wave 3 of the long term Elliott wave picture for the JSE Gold index.

Dr. Clive Roffey

25 July 2004

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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.