Gold's Impending Price Surge

August 1, 2002

I am producing this issue early as having poured over all my gold data for the past 48 hours I have reached the conclusion that the gold price is on the verge of an explosive catapult to well above $400 by the middle of 2003. The current fall to test the support at $300 is the final downside thrust in this market base pattern prior to a massive upside charge.

Gold bullion hit the overhead resistance at $330 in late May and, as I have continuously analysed, came back from the overbought levels to test the $300 support. But the significance of this data is that this down move should be the final negative gyration in the massive base pattern. The next upward thrust should take the gold price straight through all the resistance at $330 and lead to a catapult up to at least $420 as the next major move.

The oscillator is the key to this data. It did NOT form a divergence sell signal, only a reaction back from an overbought position to hold its main up trend. In these circumstances the oscillator indicates that any resumption of the bullion price up trend will be violent.

For the past few months I have been analyzing that the shares were stupidly over priced and that a serious correction was ready to take place inside a major bull trend. I detailed numerous downside counts including Africa Lease to under 400c, Harmony to under R110, the JSE Gold Index back to 2200c, Durban Deep to 2200c and Anglo's down to R135. All of these targets have been achieved. The gold market has had a classic 50% pullback. This is a healthy event, not a negative situation. It has cleared out all the nouveau gold bulls and set them back on their heels.

The gold market is like an overheated sauna; it is a pressure cooker and not a place for the faint hearted or foolhardy. It will make you sweat to the point of exhaustion and then nail you with your trousers down.

My Elliott wave analysis of gold bullion indicates that the first 1-2 and third 3-4 waves were relatively short, especially compared to the gargantuan moves of the shares. This implies a large extended fifth wave as the final up move in this leg of the market. Thus I look to this upward move to be far greater than any previous move in the bullion price.

In addition there is a huge reverse divergence buy signal. Note that the oscillator at L2 has fallen to the same level as L1 but the gold price L2 remains well above the low of L1. This indicates a continuation of the major bull trend.

When an oscillator, as in this case, pulls back from overbought territory into the neutral areas in the middle of its range it creates space for the next upward surge. BUT this usually leads to a huge catapult effect. As the oscillator goes back to the overbought regions it causes a huge upward thrust on the price chart.

I find all this data on the gold bullion chart to be explosively bullish.

The FT Gold index sums up the situation. The current correction is merely the 3-4 retracement that has formed the right shoulder of a huge head and shoulders bottom pattern. In addition we again have a reverse divergence as the oscillator has hit a recent low but the index is nowhere near making a low. This indicates more upside still to come. The target projection out of the H&S bottom is to 2500 on the index for a 280% upmove prospect.

The JSE Gold index had a large irregular top pattern that I continually detailed. That is why the C wave sell off that I constantly analysed was so vicious. But we have again hit a reverse divergence buy signal as the oscillator moved to a new low but the index has refused to confirm indicating a continuation of the upward bull trend. The 50% retracement in the index has pulled it back to test the massive support levels built up during the past 20 years bear market trading. The fact that the gold shares shot right through this level on their bull run is more than ample proof of a major bull market in gold shares, and NOT a bear market reaction à la Prechter. I look for the index to treble during the next bull phase.

I had detailed a couple of weeks ago that the Rand had to remain better than the 10,30 level or it could weaken back to 11,0. The Rand has remained remarkably strong and did not penetrate the 10,30 resistance. The uptrend is now under attack. If the Rand can move back under 10 to the dollar then I look for a powerful strengthening in the Rand to 8,50. This data under 10 is extremely powerful.

The above chart shows Anglogold relative to the JSE Gold index. For the past three years it has under performed the index. But the top oscillator on the relative strength line is diverging and indicating that ANG is ready for a sustained period of superior performance.

The Dow, in keeping with all the other charts, has also formed a reverse divergence but in this case it signals a minor rally and a resumption of the main bear trend. Note that the oscillator has made a new recent high at H2 above H1 but the Dow is nowhere near to making a new short term high. This is a classic rally in a bear market.

The S&P has exactly the same effect. The recent price surge is nothing more than a rally in a bear market with reverse divergence on the oscillators indicating a continuation of the bear trend in the near future. NASDAQ also has the same data.

Conclusions

  • The huge 50% sell off in the gold shares has hit all my downside targets.
  • It has mapped out the 3-4 wave of the bull run.
  • It is now ready to resume the bull market surge into wave 5.
  • Gold bullion is ready for an explosive move above all the resistance at the $320 to $330 level.
  • A move above $305 will signal the start of this charge.
  • I look for a move to $420 in the early part of 2003.
  • I look for a 300 to 400% appreciation in the gold shares. Not the 700 to 1000% moves of the last bull run.
  • The Rand looks to be on its way to 8,50 should it be able to strengthen under 10 to the $.
  • Long dated gold call warrants are of interest, especially on Anglogold.
  • US markets also have reverse divergence signals indicating that the recent price surges are nothing more than minor rallies in an ongoing bear trend.
Gold's special properties mean that it has a greater variety of uses than almost any metal.

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