I am often asked about dealing in South African gold shares. In the US they are bought and sold in ADR format. The Bank of America is by far the largest operator in ADR's. The bank buys the South Afdrican stock and then issues ADR's against this holding. Obviously this involves a cost on issuance and on redemption in addition to normal brokerage costs. In addition dividends paid out by the mining company are obviously paid to the bank as the beneficial owner of the stock. Before paying it out to investors they take a handling percentage. Dealing through the ADR system can be expensive. One way to combat this is to ask your broker for "Cape Delivery". This means that the broker goes direct to the JSE via a broker in South Africa. The broking charges should be cheaper and as the stock is directly in the name of the investor there should be no handling charges. Smaller US brokers will not have this facility and will go the larger broking groups to effect the 'Cape Delivery' transaction. This will involve a double broking charge as both sets of stock brokers will charge a fee. If you do not have an account with a large group then you can contact me and I will detail a top broker in South Africa that deals direct with smaller brokers in America.

I shall be away from the office on business in Europe for the weekend of the October 2nd when the next issue is due. Although I am taking my lap top with me it may not be possible for me to produce a full report. Please accept my apologies in advance and I will produce a full report the following weekend of October 9th.

The most interesting chart at this point of time is that of the $ gold price. It has been churning just above $400 for the past couple of months. This has built up a base from which the next upside charge can materialise. It will need a move back above $408 to trigger the breakout. There remains the huge overhead selling resistance at the $430 level that has dominated gold price movement for the past 15 years. Once above $408 I do not expect much resistance at $430 as the base build up for the past 15 years has sufficient strength to break well above this resistance before a correction.

In the last issue of the 'Gold & Silver Penny Stock' newsletter I discussed the fact that in a new bull phase the large producers move first whilst the smaller more marginal producers continue to form bases and the volatile exploration companies remain static. In the current situation we have had the big miners recovering over the past two months whilst the marginal stocks have continued to wallow in their bases. But all the signs are that these bases are complete and that the secondary marginal miners will now start to move and out perform the big miners as the earnings rise exponentially against costs. For the doubters this includes Durban Deep.

This is a composite chart of my proprietary oscillator that I use for my sector rating tables. I use it for comparing the long term performance of various stock market elements. In this case I compare the performance of the Dow against the $ gold, silver and platinum prices. It is very clear that from 1988 the Dow was on top of the metal prices indicating a superior performance. But the crux of this data occurred at the end of 2001 when the Dow's performance fell under all the precious metal lines. Since then the precious metals have exhibited superior performance. The shape of the chart indicates that this is likely to continue for quite some time as this is a monthly chart.

We all tend to be myopically entranced by the day by day or even minute by minute data and usually fail to stand back and look at the long term position. This is the monthly chart of the Philadelphia Gold & Silver index (XAU) that should send all bears running for cover. There is a massive reverse head and shoulders from 1998 to 2003. The upside break has occurred and been followed by a textbook pullback to test the neckline. The message is simple. Forget about the day to day prices, this is a MASSIVE BULL market.

The Gold Bugs (HUI) index had a small head and shoulders market by the black data. This broke upside and in 2003 achieved the target out of the pattern. Since then the index has mapped out a much larger reverse head and shoulders pattern. The upside count out of this pattern is to 300 from the current 200. There is a resistance level at 210 that must be broken before the next upside move can continue.

The FT gold index is a global gold index as it contains all the leading stocks from South Africa, North America and Australia. This chart is thus more representative of the global picture whilst the individual markets can be affected by the local currency. Once again there is a huge reverse head and shoulders pattern that has broke to the upside in mid 2003. Since the start of this year we have seen a typical pullback to test the breakout level. This is usually a superb buying time.

All the leading gold indexes remain extremely bullish on their weekly and monthly data.

I believe that trading volume is the most important aspect of trading any penny stock. Not only good trading volume to get in and out is required but a consistent level of volume should also be visible. I am well aware that volume varies with the condition of the market. In a bull market volumes naturally increase as buyers look for value and media hype sucks in the crowd. But in a bear trend volume usually contracts considerably as buyers retreat to the sidelines. It is no good having a stock that trades in several hundred thousand in a bull trend but dries up to a couple of thousand in a quiet period or bear market. I have received so many emails from investors who bought penny stocks for the bull run and did not sell. They remain holding the stock and cannot exit as they watch prices fall. The old adage of "a profit, is a profit, is a profit" applies dramatically to penny stocks. Trading penny stocks demands a much more stringent exit policy than trading larger capital stocks where one can exit at any time.

I do not regard penny stocks as an investment. I regard them as highly leveraged runners in a bull market, and that is all!!

I have been inundated with propositions for the inclusion of penny gold stocks with supposedly great fundamentals, according to the protagonists they are dead cert buys. The proposed fundamentals may be good, or they may be a mirage. In South Africa we have a popular penny stock called Af. Lease, it is quoted in the US (AFKDF). For years the management issued expansive prophecies of gold mining profits but never delivered. This became so bad that eventually they announced that due to the falling gold price the plant was to be mothballed. During the past year the old guard has been forced out and the management has been radically changed. For the first time it looks as though expectations could well be met. But mining penny stocks have a long history of promises, promises with little delivery. The stock prices move more on expectations than actual results.

The above discussion details the biggest problem in analyzing mining penny stocks. Who do you believe?

We do not concern ourselves with the fundamentals but focus on the technicals. In the last issue I detailed that penny stocks have a penchant for forming very clear trading patterns, trends and support and resistance levels. But all of this is useless unless one can buy and sell the share at will, hence my requirement for a consistent level of reasonable volume.

I came across some interesting data the other day. Sixteen new gold mining companies have applied for a listing on the Shanghai exchange in China. China is now the fourth largest producer of gold, mining some 200 tons annually and increasing at the rate of 25% per annum. At this point of time Sino Gold, quoted on the Australian Stock Exchange (AU:SGX), is the only quoted stock with a solid interest in China. We will be keeping a very close eye on this potentially interesting situation.

I have been asked to construct a model portfolio. So I am starting with $100 000. On this amount I will look for at least ten penny stocks to achieve a decent spread. For all the doomsday forecasters who still send me hate mails I am putting $10 000 into DURBAN DEEP as my first buy!!! The rest are analysed as follows.

Let's start with the $ gold price. Numerous analysts are calling for a drop in the gold price back to the $350 level. I have detailed consistently in 'Gold Action' that I did not subscribe to that analysis and that I expected an upside move to around $490 as the next phase, not a drop to $350. The gold price has been trading in a triangular formation for the past five months and any move back above $415 will trigger a catapult to well above the long term resistance at $430.

The price of Gold in Yen may seem to be a crazy way of assessing gold's potential. But the chart is extremely interesting. There is a huge flat top triangle that has formed over the past two years. A break above the Y45000 level will trigger an upside surge in this chart. The implication is that gold will outperform both the US$ and Yen, irrespective of the relative performance between these two currencies.

For South African penny stocks the Rand price of gold is far and away the most important data. The recent dip has formed the right shoulder of a reverse head and shoulders pattern. This is extremely bullish. A move above the neckline would push the price to R3200 an ounce. This translates to over R100 000 a kilo. Even Durban Deep at its current group break even of R86 000 a kilo will make a substantial profit. This will leverage the South Africans dramatically. This is why DROUF is my first penny stock selection.

'Gold & Silver Penny Stocks' is the sister publication to 'Gold Action' and is produced by Dr. Clive Roffey.

For FREE trial data contact :-

Dr. Clive Roffey
info@utm.co.za
www.charts.co.za
www.shareaction.co.za

19 September 2004