Oil Index - Possible Implications

March 1, 2004

Summary and Conclusions

The evidence is mounting that the US Federal Reserve Board, and the Establishment which it represents, is losing control.

The probabilities are rising that "The Markets" will soon (within weeks/months) become unmanageable and will enter a period of painful volatility

*****

In the past few weeks my attention has been increasingly drawn to the chart of the Oil Index below (Source: BigCharts.com):

Bullish aspects

  • Above its 48 month Moving Average
  • Parabolic SAR confirms bull trend for time being
  • MACD nowhere near historical highs (implying further upside potential)
  • Reaching for a Double Top through which - based on MACD positioning - it might possibly break to the upside following consolidation.

Bearish Aspects

  • Slow Stochastic historically overbought (Implying possible intermediate term pullback)
  • Momentum historically overbought

The following Point & Figure Chart (source StockCharts.com) is bullish according to the StockCharts method of analysis - with an upside target count of 686.47 which, in turn, implies that the Double Top will be penetrated to the upside. (However, according to my own horizontal count analysis, the short term target move has been reached - implying a "possible" Double Top, for the time being, at the 606 level):

Another P&F view - ratcheted down to a three box 5% removal, shows this resistance level more clearly:

Importantly, according to StockCharts.com method (which appears to be based on prior vertical move counts as opposed to horizontal move counts), the Oil Index has a target count of 945.23

However, on a 3 Box 10% reversal chart, the Double Top is clear, and there is no upside target count using either the horizontal or vertical count method - although, if the price were to break up out of the Double Top, my horizontal count based target would be around 700:

Interim Conclusion

The Oil Price - which has been acting more strongly than the S&P500 in the past few months - appears to have the potential to break to new heights, following a possible intermediate term consolidation.

The most likely interim upside target destination - should the Oil Index break up - is 680 to 700 based on a confirmation by two different measuring techniques of that level.

******

Oil Index Compared with the S&P500 and the $XAU

In hindsight, the strong dollar policy of the Clinton years ( and the loose money policy of the Federal Reserve Bank) created aberrations in the financial markets - one example of which is clearly visible from the following Relative Strength chart showing The Oil Index relative to the S&P500 and the $XAU:

From 1995 - mid 1997, the Oil Index and the S&P 500 were travelling roughly in tandem. Around the time that the strong dollar policy (loose money policy) started to bite, the Gold and Silver Index began to fall quite strongly relative to the Oil Index, whilst the S&P 500 began to accelerate upwards, and away from the Oil Index.

As mentioned, by reference to charting "trading" indicators, the conclusion can be drawn that the Oil Index is severely overbought. Of importance, when we look at the same indicators on the $SPX, they also reflect a severely overbought situation - with the MACD also lagging somewhat (not confirming). Could it be that if the Oil Index breaks UP, the S&P will also break UP? Alternatively, are they both about to break DOWN?

Another interesting observation that flows from both of the above charts is that - over a period of ten years - the Oil Index and the S&P 500 both started out at the same point and have eventually ended at a similar point - roughly 125% - 140% above their respective starting points (a compound growth rate of some 9% p.a.).

Clearly, this growth rate has not been "normal" in the context of previous history, and there have been arguments and explanations raging that it has been an expanding Money Supply that has facilitated this growth rate,

One implication of this similar ending point is that the excesses caused by the strong dollar policy (and the now apparently abating growth rate of the Money Supply) appear to have worked their way through the system.

Further, another interesting observation is that the Gold and Silver Index is still around 25% BELOW where it started out prior to the Strong Dollar period.

*******

A Weaker Dollar. What now?

Of course, all of this begs the question: If the USA is to no longer pursue a strong dollar policy, what will happen to the price of Oil and Gold (and the S&P500)?

Dr Clive Roffey recently published the following VERY important chart of the JSE Gold Index

JSE Gold Index

My analysis of the volume patterns on this chart lead me to the unambiguous conclusion that the breakout above the 20-25 resistance level has been genuine, and what is being experienced is a "normal" consolidation. Ie The market is anticipating an increase in the Rand price of gold.

A highly significant implication of this is that "The Market" appears to be anticipating a severing of the inverse linkage of the movements of the Dollar Index and those of the Dollar Gold Price.

The above in perspective

It is by now well understood amongst the readers of Gold-Eagle that a bet on a rise in the gold price is really a bet that "The Establishment" is going to fail in its ongoing efforts to "manage" the world's economy.

Analysts of gold price movements range along a spectrum from "Let's blast the Establishment out of the water, and hang the consequences" (The GATA camp at one extreme) to "If the Establishment fails, and we have no alternative plans in place, we could be facing a VERY cold Winter ahead" (Yours truly at the other extreme). In the middle of the spectrum are those analysts who are not worried about the Establishment's role at all, and who are just watching the gold price movements hoping to make a buck out of these movements.

In my mind, (and this is not a reflection on my ethical stance , as I happen to strongly disagree with what the Establishment has been doing) I have been expecting that the Establishment would succeed in its efforts. I am holding gold shares as an insurance policy against their failure, and I am holding silver because I think they have totally screwed up and we are almost certainly going to experience a "melt-up" in the silver price at some stage in the very near future.

It has been because of this mindset that I have been fixated on the $545/ounce target price of gold, and I have been acknowledging (but rejecting) the possibility of a $3000/ounce target. Importantly, this rejection has not been based on emotionally driven "hope", but rather by "hard" conclusions that I have been able to draw from both technical and fundamental analysis techniques.

(As an aside, I have watched over the past six months as the COT reports have shown the traders' risk exposure on their net short positions in Silver Futures contracts having risen from $2 billion to nearly $2.8 billion, and there is a serious question as to how and why the authorities could have allowed this. Clearly, the traders are finding themselves with a noose around their necks, which is now inexorably tightening, and threatening to garrotte them).

At first glance, the chart below (Source: DecisionPoint.com) is showing that the $400/ounce gold price level will offer strong resistance, but that following an overcoming of this resistance (maybe in a couple of months), a target of $500 - $525 is possible, and maybe even $550/ounce.

Dr Roffey's chart of the JSE Gold Index provided a critically important clue - and I thank him most sincerely for sharing this information with us.

The volume movements on that chart have been extraordinary, and a CLEAR implication is that the Rand price of gold can be expected to break UP strongly. I.e. the second "maybe" has turned into a virtual certainty, and there is likely to be a strong overshoot of the $545 level.

In turn, this begs the question as to "what will drive this"?

From my perspective, an eventual break UP in the Oil Index seems to me to be a very likely cause of a severance of the linkage between The Dollar Gold Price and the US Dollar Index which, in turn, could give rise to an exceptionally strong up move in the Dollar Gold Price.

I have reached this conclusion because it is now starting to become clearer to me that The Establishment appears to have been too clever by half, and they have "shot themselves in the foot".

At the time of the Invasion of Iraq, a man who should have known what the Establishment was thinking (Mr Rupert Murdoch) was quoted as saying that a fall in the oil price would stimulate the World's economy. It follows that a RISE in the Oil Price will be viewed by the Establishment as BEARISH to the World's economy.

It further follows, that a break UP in the Oil price is likely to be accompanied by a break DOWN in the S&P500.

Finally, if the S&P500 breaks DOWN - and whilst I have acknowledged in a previous article that the charts are pointing to a possible "rush to cash" given the long term Primary Bear Trend in the Bond Yields - there is an argument that the 30 year yield could break UP out of this long term downtrend given that this particular yield is in the upper quadrant of its downward pointing channel, and given that the short term yields are looking more bullish (bearish for bonds) than bearish.

If the bonds break down, where will the foreign investors be predisposed to park their cash? In Yen denominated Bonds that yield next to nothing? In the Euro denominate bonds where the "wall of cash" will likely be greater than European ability to digest it? In Gold, where the ultimate problem is that the Gold Market is far too small to accommodate anything more than a fraction of this volume of freed up cash?

No my friends, if the Oil Price breaks UP, we are likely to experience a dislocation of the world's financial markets as the US Dollar breaks down through its long term support; as Bond yields in Europe take a dive, and as the Gold Price explodes upwards.

A "final" clue that all is not well is evident from the following charts - given that underlying prices of ALL the commodities which are represented in the index are not capable of manipulation by The Establishment.

The Commodities Index has ALREADY broken up to new highs, and a horizontal count price target objective will take the $CRB to above 300.

Finally, the following is a direct quotation from an interview given by HRH, Prince Saud Al-Faisal, Suadi Arabian Minister of Foreign Affairs, on February 25th 2004.

"Question: In your speech in Bruxelles you stated that sustaining partnership with the west is needed and you added that extremists from both sides would work on dividing us a part, what are, in your perspective, the issues that can bring us in the Arab world together with the west especially when we know that the Arab countries already have bilateral and multilateral dialogue with the European countries?

HRH minister: I hope I am not going to explain all the speeches I make in a small society, but what I think we should do first of all, increase the understanding of our situations, abandon stereotyping each other and build ties based on interests not ties based on control where each one of us try to change the other to be like him. Relation with the west should be based on the acceptance of variety and respect of history and civilization of one another. By these procedures we will get to a common future values that will bring us together whereas imposing and stereotyping our region and say that it can solve its problems by its self or it does not have the knowledge of its problems so how can they solve them, is all wrong perspective of the region and that what should change so we can have a better relations between us."

Source: http://www.mofa.gov.sa/ooo/mofa_stat/saud-25-02-2004.htm

My interpretation of what the Prince said, is that whilst co-operation with the West is desirable, the Arab World is no longer prepared to tolerate being coerced in its decision making.

"We do not embrace the concept of globalization because we prefer to keep our individuality. Don't tell us what to do. Let's work together, in a spirit of mutual respect"

My observation is that ultimately, neither the West nor the Arab Oil Nations nor even "joint activity" of both camps co-operating to the fullest, will be able to finally determine the Oil Price. Ultimately, the oil price cannot be managed by any camp/s; regardless of the goodwill that may exist between them.

"The Markets" - which are totally dispassionate - will make the final call.

Overall Conclusion

The "Smart Money" has started to make its move.

Whilst the Central Bankers have been "managing" the conventional Financial markets for some time (Currencies, Gold and US Yields) the "uncontrollable" (by the Western Establishment) markets (Oil and Commodities) have been signalling a possible sea change coming.

Whilst the Gold charts are overbought and could experience some continuing pullback as the manipulation continues, when the markets finally wake up to what is happening (when the Oil Price finally breaks up) the gold market will "turn on a dime". At that point, the "traders" will be left sucking air.

Timing

This is impossible to call accurately. It could be up to a couple of months as the Establishment makes one last gasp attempt at obfuscation leading up to the US Presidential elections. This "last gasp" effort may include some unconventional moves - for example, an "announcement" that Osama Bin Laden has been captured. (Such an announcement will more than likely provide a short term injection of optimism, causing the gold price to fall strongly as the US Dollar rises, and causing the US equities markets to rise in one last knee-jerk reaction.)

Another example could be world media headlines regarding the dangers of Global Warming leading to catastrophe in the "next 20 years" - thereby causing consumers to panic into NOT buying oil for their SUV's and gas guzzlers.

But as has been demonstrated time and again in History, "The Markets" cannot ALL be manipulated in such a blatant manner, and NONE can be managed over the long term. In the end analysis "Pride cometh before the fall". It appears that the Western Establishment has become so arrogant that it has come to believe that ordinary folk like you and me are incapable of independent thought.

The Bottom line is:

The charts are pointing to a view by the Smart Money that there is an increasing probability that the Establishment is destined to fail.

*****

To a mouse, on turning her up in her nest with the plough, Robert Burns, November 1795.

" Wee, sleekit, cow'rin, tim'rous beastie,
O, what a panic's in thy breastie!
Thou need na start awa sae hasty,
Wi' bickering brattle!
I wad be laith to rin an' chase thee,
Wi' murd'ring pattle!

I'm truly sorry man's dominion,
Has broken nature's social union,
An' justifies that ill opinion,
Which makes thee startle
At me, thy poor, earth-born companion,
An' fellow-mortal!

I doubt na, whiles, but thou may thieve;
What then? poor beastie, thou maun live!
A daimen icker in a thrave
'S a sma' request;
I'll get a blessin wi' the lave,
An' never miss't!

Thy wee bit housie, too, in ruin!
It's silly wa's the win's are strewin!
An' naething, now, to big a new ane,
O' foggage green!
An' bleak December's winds ensuin,
Baith snell an' keen!

Thou saw the fields laid bare an' waste,
An' weary winter comin fast,
An' cozie here, beneath the blast,
Thou thought to dwell-
Till crash! the cruel coulter past
Out thro' thy cell.

That wee bit heap o' leaves an' stibble,
Has cost thee mony a weary nibble!
Now thou's turn'd out, for a' thy trouble,
But house or hald,
To thole the winter's sleety dribble,
An' cranreuch cauld!

But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o' mice an 'men
Gang aft agley,
An'lea'e us nought but grief an' pain,
For promis'd joy!

Still thou art blest, compar'd wi' me
The present only toucheth thee:
But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear! "

 

The more things change, the more they stay the same.

14 karat gold is 58.5% pure gold

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