Dr. Clive RoffeyReserve Bank Govenor, Tito Mboweni, on Thursday described consumer spending as "robust" and one of the underlying factors for the 50 point raise in interest rates. He detailed that spending continued to be at too high a level for the Reserve Bank to stay within its inflation targets and warned that there may be more rate hikes to come at the end of the year.
Interest repayments on mortgages will cost more and property prices are likely to adversely affected in the short term. I do not expect a sell off in property prices but rather a well deserved breather after the last few years of rampant rises.
Although inflation remains a top economic priority the crime rate unfortunately does not appear to enjoy the same governmental support. If as much effort were placed into combating crime as was placed into the money gathering aspects of our economy we would all be happy.
The spending spree is regarded as a problem by the Reserve Bank economists but it also shows that black economic empowerment is filtering through to the purchasing levels of the economy. The rising black middle class is becoming a powerful consumer and will become even more dominant as time goes on. The larger the black middle class the safer the whites will feel as it will put a strong buffer between them and the more radical left wing elements. A strong black middle class will have something to lose in the event of any extreme socialist doctrines and is likely to become more politically vociferous in defence of its newly achieved status and standard of living. This is the buffer zone that will eventually determine the future economic growth of this country, not the radicals who are being slowly marginalized by this new and growing powerful economic group.
Gold is hovering on the brink of a serious upside breakout. It has been churning around the $580 level for the past two weeks with occasional dips under $570. But the key level is $580. A break above this and I expect to see a serious upside attack on the $625 main breakout point. Once through $625 and the old high will be history. I reiterate that this is a LONG TERM bull market in gold and other precious metals that is still only in its long term infancy.
But probably the main chart of the gold market must go to the rand price of Durban Deep. It has a long term downtrend and also a flatter resistance level. Both of these trends converge at the R11 level. The current price of R10 is brewing up for a major break above this R11 key resistance. Once through this resistance and I expect my oft stated target of R21 to be made. I am looking for a 100% upside move in most gold shares during the coming months.
The Dow has eventually spluttered to new all time highs. Frankly I am not convinced and all my oscillators on the weekly data are grouping into their selling zones for a potential sell signal. I do not expect much further upside potential on this index. Frankly it looks more like managed window dressing than a true free spirited bull market.
I rate the oil price under $60 a barrel as an absolute giveaway. On my analysis I look for an end to the current correction and a serious trend reversal to take out the previous highs. In the meantime the base metals are looking ready for the next upside stage in the long term bull market. Lead has already led the pack and screamed upwards.
But the most impressive data must go to the grains and softs. This has been an ignored sector of the commodity markets and wheat, corn and Soya all look ready for some serious upside potential. I have continually detailed my weekly Grain Report that the upside for the Chicago grains is enormous. Soya is the current laggard but has a huge base ready for take off.
This chart of Durban Deep is a key element in deciphering the long term analysis of the gold market.
In the chart areas A and C were major buy divergences with B as the sell divergence in 2002. But these are history. The main detail of this chart revolves around the blue and red lines.
In 2001 the blue line on the RSI continuously rose with the share price indicating a stable bull trend. Again in 2005 it mapped out the same picture. But at the end of 2001 the RSI started to divergence and form the major sell divergence. This is the difference. In 2005 there were no signs of any sell divergence as the share price corrected. This implies that the correction in 2006 is just that; a minor breather in an ongoing bull trend.
The important aspects of this correction are the main downtrend in blue on the share price since 2002. The price has effectively walked sideways out of this trend. It has not yet been properly broken. But the key trend is the red flatter trend line that has acted as a support and now resistance level to further price progress. Both of these trend lines will break once the share price moves above R11. Such a break will signal a move into a strong upside NEW MAJOR BULL Market.
If DRD moves into this mode, so will the rest of the gold shares.
Gold bullion is being governed by the down trend line that has been in operation since May. But there is a critical short term resistance at $580. A break above this level will trigger the attack and break above the down trend. I rate this as a key reversal area.
But the most important aspect of the gold price is that it is still inside a long tem bull market and that this is the end of an old correction and not the start of a new bear market.
Gold bullion also has its RSI showing a clear buy divergence. A break above the top trend on both the bullion price and RSI would confirm the new upside. This is a very bullish chart. Not a bear situation. It is a major buying area and not a selling one.
Brent Crude Oil has similar characteristics to gold. There is a down trend that is still intact. In addition there is a short term resistance at $60. The oscillators have already grouped in the buying area and there is an RSI buy signal. This whole set of circumstances indicates the end of a correction and not the start of a new bear market. Once the reversal has occurred to move the oil price back above $60 it will signal the end of the correction and start of a new BULL market that should take out all the previous highs.
Copper remains in its flat bottom triangle waiting for the breakout. Along with most of the other base metal charts. Lead has already zoomed and the rest are brewing up to follow. The metals remain strong bull contenders.
Yes the gold share market has been boring for the best part of this year. But the JSE Gold index remains in a major bull market. After the huge I-II correction we entered wave III in mid 2005. For most of this year the index has been churning inside the diamond pattern that represents the 1-2 correction of wave III. Waves 3 and 5 are still to come. This is only the start of wave III. I seriously expect to see a 100% upside move in most stocks once the diamond pattern has been penetrated. But this is a long term BULL market. Stay with it.
The FT Gold index is shown with its oscillators and their majorly bullish grouping effects. These are serious buy signals indicating a reversal to the recent downtrend. This index represents a range of African, American and Australian shares and is a true global gold index.
The FT 100 index is shown with all its grouping oscillators and their previous buy sell signals. The current grouping at the top of the range indicates a selling zone and one that should be used for profit taking. Unlike the Dow this index has not pushed through to new highs. Be careful with global equities. The new highs look attractive but the support data is decidedly dodgy.
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Dr. Clive Roffey
15 October 2006
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