Dr. Clive Roffey
For some time I have been analyzing that I expected a decoupling of the Rand, Dollar and gold price. But I had not been able to quantify which element would go which way and be responsible for the decoupling. I am now looking for a stronger dollar, weaker Rand and strong gold price. I believe that it is the gold price that will decouple from its previously dogmatic relationship to the US currency.
It has been a standard reaction for many years to expect that a strong dollar would automatically lead to a weakening gold price. But I believe that is all about to change.
Approximately thirty years ago I coined the phrase that gold is the barometer of instability. This instability could be fiscal, economic, social or political. But for the past decade this relationship has not been evident as the dominant role of the dollar overpowered any reactions that the gold price might have had to oil problems, Afghanistan, Iraq, Iran, Korea, UK bombings and 9/11 as well as US trade deficits, pension disasters and dramatic lack of US savings. Gold has effectively ignored all these increasingly dangerous and continuingly destabilizing situations. Monetary refuge was obtained by investing in the dollar not in gold. This situation has reached breaking point and gold is about to shatter the shackles of its currency constraints and resume its role as the asset of last resort.
When one studies the gold price quoted in the various currencies it has been evident for the past couple of years that gold has been outperforming all the leading global currencies. I have on several occasions detailed that surreptitiously the gold price had resumed its role as the centre pin of the monetary system, despite all the negative comments from financial institutions and central banks to the contrary.
Once the expected decoupling occurs the role of gold will become far more visible to the investing community. Already I am hearing significant rumblings from London that their finance houses are reviewing their attitude to gold. The bottom line is that the Rand price of gold, the driving force behind the share price of South African gold stocks, is ready for a substantial bullish rise that will increase the attractiveness of the South African gold stocks over their Australian and American counterparts.
Bull markets are conceived in the womb of despair, not euphoria. The websites have been full of comments that the gold strike on the South African mines was going to have the same effect of knocking the index by 1000 points as it did during the last strike in 1987. I have already detailed that this theory was absolute rubbish as the collapse in October 1987 was well after the gold mine strike and due to a general market collapse. It was not specific to the gold sector but affected every sector in the market. The current 3 day strike came and went without any deleterious effect on share prices, in fact they went up!! Since then the negative comments have revolved around the settlement with the unions in which the doomsters have decided was too onerous and that the mines cannot afford the agreed increases and are cash strapped and ready to collapse back into the holes left by their mining operations. Once again I classify this as absolute rubbish.
I have already analyzed that the low in May was the bottom of the three year bear market correction. The rise in the gold shares from May to July was the first bull leg of a brand new bull market whilst the reaction back since then was merely a minor correction and constituted the right shoulder of a serious reverse head and shoulders pattern. This reaction has ended and the gold shares are set for the third wave up in the new bull trend. All eyes will be on the critical 1880 level on the JSE Gold index as not only will this signal a break above the neckline of the reverse head and shoulders pattern but also the down trend that has dominated the JSE Gold index for the past three years. A break above 1880 will cause all the current bears to reverse their attitudes and signal the start of a major upside surge in which the fundamentals start to change direction and fit the picture that the technicals have been detailing for some time.
The whole of the new bull market data on the JSE Gold index is detailed above.
After the major index low in 2000 the market rocketed on the back of a rising gold price from its $252 low coupled with a pronounced weakening of the Rand. It topped out in April 2002 and since then the gold index has reacted back in a standard correction that took the form of the flag pattern that I have discussed on so many previous occasions. This constitutes the first upward thrust in wave 1 and first correction in wave 2 of a new long term bull market. Note that the whole of this major correction occurred between down sloping parallel lines and formed what is know as a Flag pattern.
The bottom of the flag correction occurred in May 2005 and was accompanied by the usual negativity associated with market lows that the sun will never shine again and all the mines are going bust.
It must be remembered that flag patterns are BULLISH formats. They are classified as continuation patterns that are merely interludes prior to a continuation of the main bull market trend. This particular flag formed the first correction 1-2, of the new bull market. The bottom in May marked the start of the new bull market that will constitute wave 3 of the major long bull trend.
The most important aspect of any wave 3 is that it is unlikely to be the shortest wave and also that it MUST go well ABOVE the previous top of wave 1. In this case the index MUST go well above the previous April 2002 highs at 3740 from its current 1760, and that includes Durban Deep!!
There are two ways of presenting the above data. I have detailed it in semi-log format that shows the vertical price scale in a percentage format, where the scale distance from 10 to 20 is the same as from 20 to 40 as they both indicate a 100% increase. But many analysts prefer to draw charts on a linear scale in which the scale is like a ruler and the gradations are in a standard block format. This gives a totally different shape to price charts. I am adamant that the semi-log format is essential for long term data as investment is all about percentage return on capital invested and thus a percentage scale is essential to obtain a realistic picture. But the linear scale has a specific format at this point of time that is being watched by numerous analysts and that could have a significant bearing on the next move in the gold market.
Note that the top black trend line in the above semi-log percentage chart is well above the current price level. A grey shorter term trend is needed to detail the recent price action. Compare this to the following linear chart.
There is a dramatic difference in this linear chart of the JSE Gold index. Every price rally has hit the down trend. The top trend line has been totally dominant and has been tested seven times. Also note that the lower trend is not parallel to the top and thus has not formed a flag pattern. It has mapped out a far more bullish wedge formation in which the two trends are converging.
In addition I have marked the reverse head and shoulders pattern that has formed since the start of the year on both types of chart. The right shoulder of this pattern is the minor first 1-2 correction of the new bull trend.
But the key to this chart is the horizontal neckline of the reverse head and shoulders pattern. It is currently sitting at 1880. A move above this resistance will not only break above the neckline and confirm the upside potential of the head and shoulders reversal pattern, but also break above the top bear market trend line. This is a far more important break as it will cause all those analysts watching this trend line to turn bullish and to advise their readers and clients to enter the market. The break above 1880 could result in a catapult situation in which a sudden dramatic upside surge of interest takes place.
If this analysis is correct and the index breaks above 1880 I would expect to see a 50% surge in gold share prices by the end of the year. This is potentially a major market breakout area and the latent power of any break above 1880 should not be underestimated.
It is very evident from the data in our sister newsletter 'Gold & Silver Penny Stocks' that the vast majority of the extremely sensitive penny stocks have formed bases and are starting to lift off those bases. These responsive stocks are unlikely to present bullish credentials if the main gold market is not about to lift off. It often pays to ignore the heavyweights and look at the minnows for an alternative viewpoint on the market.
At this point of time I believe that all gold analysts and investors should be focusing on the 1880 critical breakout level of the JSE Gold index. The gold price has broken out of its recent lethargy but it is this share index that will act as the real confirmation of a true bull market in gold shares.
ASA, the US gold dominated investment trust, is compared to the DJIA and we note that a major trend line has been dominating both the share price and grey relative strength data. A break above this trend will set the US gold share market alight.
The FTSE Gold index relative to the FT100 has a similar major trend that has confined both the gold index and its relative strength against the general equity market. Once again a move above this trend will trigger a serious break into a new bull market in FTSE gold stocks. The upside break above critical levels will not only trigger a serious upmove on the FTSE and US charts but also on the South African golds. This is a potentially universal breakout in gold stock performance.
For FREE trial data contact :-
Dr. Clive Roffey
info@utm.co.za
www.charts.co.za
www.shareaction.co.za
21 August 2005
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