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Change in the Wind

June 2, 2005

The following article is unusually technical, and may not be of interest to many people.

However, because it arrives at some interesting conclusions, these conclusions are set out below:

  • The Markets are giving hints that the French "No" vote may not have been a merely a blip on the radar screen (as the media would have us believe), but may indeed have represented a turning point in the tide of men's affairs. ("Humankind" may be a PC word, but it is very contrived - rather like "Person Hole Cover")
  • The vote in Holland on this coming Wednesday is therefore particularly important. If the percentage of "no" votes is less than the anticipated 60%, then the French no vote may in fact be nothing more than a blip; and we can all go about our business. But a "no" vote in Holland - that shows a majority of greater than the expected 60% - will represent a second blip which will represent more than just "coincidence".
  • In the event that the French outcome was a blip, gold's upside destination is $475; and (although this article does not examine gold's downside potential, it could possibly fall to around $400)
  • However, in the event that France's "no" is followed by Holland's "no" with a majority of greater than 60%, then the upside potential of gold could be as high as $823 per ounce.

The two charts below (courtesy Decisionpoint.com) show both the $CRB and the $XAU indices in falling wedge formations (typically bullish); and the PMO oscillators of both charts are showing buy signals as the PMO's cross over their 10 day Moving Averages from an oversold position.

The third chart - which is a ratio of the $XAU and the $CRB (courtesy stockcharts.com) is particularly interesting because it is showing a strong (bullish) non-confirmation with line AB declining even as line CD is inclining. Further, the MACD of the ratio has broken up through its declining trend line - also giving a buy signal.

The implication of the above is that whilst both the commodities and the gold shares are giving buy signals, the gold shares are likely to outperform on the upside.

The extent of the relative superior performance - based on the following chart - could be as much as 50% if the ratio does nothing more than bounce up from its low of 26.76 to around 39

This begs the question as to what will happen to the gold price itself along the way, and the answer appears surprising. Based on the following chart - assuming the ratio of the gold price to the commodities only gets back to its old highs, there appears to be only a 10% rise in gold being anticipated relative to commodities (140 rising to 155):

But there is another scenario that could possibly manifest; and that is that the ratio of gold to commodities could break to a new high.

Should this happen then, based on the horizontal count technique, this would imply a possible further upside count of the ratio of 30% - giving rise to a total upside move of 40% from current levels.

Of interest is the fact that the upside count target of the following chart using both horizontal and vertical methods is around $475, so the gold chart itself (which gave a buy signal in November 2004) is not showing signs of a coming upside explosion.

In turn, this begs the question: What is the upside count of commodities?

Now this chart is particularly intriguing, because it can be interpreted in two ways:

From one perspective - based on the high pole warning - the commodities index could come all the way back to between 260 and 270. In turn, this would explain why the ratio of gold:commodities shows a similar upside potential to gold itself..

All this fits, except for the fact that the commodities chart appears to be breaking up from a falling wedge. How can one chart be showing a buy signal whilst the other shows a sell signal? It doesn't make sense.

The answer lies in the fact that the buy signal is occurring on a daily trading chart, whilst the bearishness is showing on a "time independent" Point & Figure Chart that has been desensitised by selecting a scale of 3 X 3% box moves.

The following chart shows that - as with commodities - gold shares look set to outperform gold itself, but the anticipated move is not as stark. From the position of the RSI oscillator, it looks like the ratio of the $XAU to gold has less upside potential. (which would reinforce the argument that the "buy" signal on the commodities chart may only be a function of trading static).

Nevertheless, to be totally objective, one needs to contemplate the possibility that the short term trading buy signal on the $CRB chart might have the effect of negating the high pole warning. What will happen under such a scenario?

If the commodities reverse upwards again from the high pole reversal, then the vertical count target for the move will be around 360.

Very roughly, the ratio of $420/300 = 1.4; and if the commodities index rises to 360, and the ratio of gold:commodities rises by 40% to 1.96; then the implied target price of gold would be 1.96 X $420 = $823.20.

Of course, this is pure speculation, but we should not lose sight of the fact that there appears to be a coming bullish change in the relative strength charts of $XAU to BOTH commodities AND Gold.

It is conceivable, that gold shares are pointing to a change in the wind.

Are there any other pointers to such change?

Two charts that caught my eye last week were the following (courtesy Decisionpoint.com)


The top oscillator shows the percentage of Dow Jones Industrial PMO oscillators giving a buy signal were 90% as at May 27th, and bottom chart shows that 80% of the Dow shares were above their 20 day Moving Averages.

From a trading perspective, this represents an extremely overbought situation.

Why is this of relevance?

The following chart (courtesy stockcharts.com) shows that gold shares have been in a bear trend relative to the Dow Jones since October 2004. But it also shows both the RSI and the MACD oscillators are bouncing up from oversold positions, and AGAIN, there is the non-confirmation of falling bottoms on the price chart (April vs April), but rising bottoms on the oscillator.

To put this into context, I am also showing below the weekly chart of the above relationship

Here the bounce up of the MACD and RSI oscillators are shown more starkly. Clearly, the $XAU is behaving in an unusual fashion relative to recent history.

Why the microscopic attention? Why am I going into such anal detail here?

On this Sunday past, the French referendum voted 56% against accepting the EU constitution, and on this coming Wednesday, the Dutch are expected to vote 60% against.

To this analyst, that number of 60% is a "nerve ending". If the majority is less than 60%, or if the Dutch accept the EU constitution, then I will be inclined to accept the view that gold has an upside potential of around $475 - because the French "no" vote will probably be nothing more than a blip on the radar screen. (And everybody loves to hate the French anyway)

But if the ratio of "no" voters in Holland is greater than 60%, I will be predisposed to believe that two blips are NOT just coincidence. Two blips will tell me that there really is change in the wind; and that the Establishment will be on the back foot. And, further, that the French electorate in voting "no" may well have represented a turning point in the tide of man's affairs.

A greater than 60% no vote in Holland will not only result in further downward pressure on the Euro, it will likely also put the spotlight once again on the "sensibility" of the concept of globalization, and the inherent value (?) of the US Dollar - and people will once again start asking questions about the sensibility of owning dollars to the exclusion of all other currencies.

All of which will, once again, draw the world's attention to the value of gold, given that the Euro will have been voted out of the equation.

Maybe the markets really are telling us something here.

Usually, gold shares move in the same direction of the Dow Jones. If the Dow falls, then gold shares also fall - only more. If the Dow rises, then gold shares rise - only less.

But this time around the charts are showing buy signals for gold shares, and are also showing an extremely overbought Dow.

Maybe there really is change in the wind, and this analyst in particular will be watching the outcome of the vote in Holland with great interest.


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