Of particular interest is that an apparent technical breakdown in August has been superseded by an apparent technical break-up in the week ended September 23rd 2005. . What, if anything, do these signals portend?
One problem with technical analysis is that daily/weekly/monthly price charts are the subjects of intense scrutiny by too many eyes. Clearly, if tens (hundreds?) of thousands of analysts are attempting to use charting techniques to "beat the market", technical buy and sell signals should not - as a matter of logic - be mechanically followed. Also as a matter of logic, "investment" activity that is driven by a large number of lemming-like followers of chart signals is ipso facto very likely to give rise to "false" signals.
Does this mean that, therefore, the charts have no value?
As with everything in life, the answer is neither black nor white. Arguably, it is equally nonsensical to dismiss charting out of hand given that what is represented by the chart patterns is a pictorial representation of historical fact.
With the benefit of hindsight, it is always possible to point to some technical event which can be demonstrated to have represented a "true" breakout. The problem is that many (if not most) true breakouts are preceded by false breakouts. These false breakouts undermine confidence, and mistakes are often made as a consequence.
There are three ways of ameliorating losses and/or augmenting profits if one is comfortable to rely on technical analysis as one investment tool:
The following chart (courtesy Decisionpoint.com) provides evidence that the industrial equity market in the USA is overvalued by historical standards. Price:Earnings ratios (the number of years it takes an investor to get his/her capital back if earnings remain constant) are well above the "fair value" level:
Also of significance, however, is the fact that the black line is now no longer tracking at the "mania" levels that began to manifest in around 1997 as the black line started to rise above the red line.
Notwithstanding - based on value considerations - one would be betting against the odds by investing in industrial equities at these levels, and one should therefore ignore technical buy signals and be predisposed to believe technical sell signals in the industrial markets.
What about Government Bonds? Do Treasuries represent a sensible investment opportunity based on "values"?
The 25 year chart of the Long Bond price (source: www.decisionpoint.com/prime/DailyCharts/20ltindx_20yr.html) shows that a Primary Bull market in bonds has been in existence since 1985. Clearly, this trend is getting somewhat long in the tooth, and it is of significance that the PMO oscillator tops have been falling since 1987 - even as the bond prices themselves have been rising.
What this technical divergence shows is that the "rate" of price increase has been steadily deteriorating since around 1987 and, given that the "mean" of the index over the past 25 years seems to be around the 80 mark, it would appear that there is a higher probability of losing money in the bond market than of making money by investing at these levels.
The lack of value in both the Industrial Equity markets and the Bond markets presents a conundrum. Where should one be investing?
Historically, "Real Estate" would have represented one serious option and, indeed, an asset bubble has manifested in this area over the past few years. But if the emphasis is on "value" then it would appear that the timing is not right to now invest in Real Estate. Against a background of excessive optimism in the Real Estate markets, excess capacity is the logical outcome - and a cap on occupancy rates is more than likely going to represent a cap on capital growth. By extension, falling occupancy rates will logically result in falling real estate prices, as competition amongst landlords puts downward pressure on rentals.
Against a background of all of the above, the following charts should be of immense interest to those investors who are more comfortable chasing value than momentum.
The 25 year Gold Price Chart can be seen to have given a significant buy signal (obvious to everyone) in the past month:
What this analyst is focussing on more than anything else on this chart is that the $500/oz level represents a significant historical resistance level, and the PMO oscillator appear to be bouncing down from its 1983 and 1988 peak level. Equally clearly, the level "10" does not represent a ceiling. Nevertheless, in the context of "values" this analyst is nervous that if the gold price breaks up above the $500 level, the world will generally be experiencing a deterioration of financially expressed values flowing from inflationary pressures. In this context, an investment in gold and related assets represents more of a defensive "insurance" policy than it does an aggressive "investment" policy.
As a matter of style, this analyst is not comfortable planning for failure, and "possible failure of the world's financial system" is what would be anticipated by a breakout above $500/ounce. Arguably, there must be more constructive ways of investing.
Apart from the area of unlisted equities - which has been examined in preceding articles - Silver offers the possibility of a two way bet, as can be seen from the following chart:
Yes, the PMO oscillator is also apparently bouncing down from its 1983 level - but in this case, the 1983 level coincided with a silver price per ounce that was roughly double its current level (as opposed to gold at roughly 5% above its current level).
In terms of "values", silver is significantly undervalued relative to gold on an historical basis.
Also of significance is the fact that the 1999 low in gold's PMO oscillator was lower than the 1985 low, whereas the 2002 low in silver's PMO oscillator was significantly higher than its 1987 low. Technically, the "nuances" are pointing to a possibility that if both gold and silver are undervalued and are in Primary Rising Trends, silver may have significantly greater longer term upside than gold.
Ultimately what is attracting this analyst to silver in preference to gold is that the relative upside potential is not dependent on a general failure of the world's financial system. Silver is absolutely undervalued from a long term perspective - regardless of the state of the world's financial system.
So, the question arises: Are there any nuances and/or hints that silver may be stirring relative to gold?
Flowing from the following two charts (courtesy StockCharts.com), the short answer is that:
From a medium term perspective, Silver is also seriously oversold relative to the $XAU (which might very well mean that the $XAU is setting itself up for a pullback)
However, from a short term perspective, silver is seriously overbought in terms of the oscillators - and could be due for one last correction which might shake out the few remaining stale bulls
Summary and Conclusions
Buy signals on the Precious Metals charts should probably be taken seriously against a background of the notions of these assets being relatively under-valued and in Primary Bull Trends.
Silver seems to offer more upside than gold in the longer term
Silver is fairly seriously overbought at present and could pull back in one final "shakeout" of the stale bulls.
Brian Bloom
Australia, August 28th, 2005