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The leading global stock and property markets have
been roaring for the past four years. The driving force behind a lot of this
strength has been related to the bonuses paid to bankers and fund managers in
the New York and London markets. It is generally believed
that some $30 billion was this year paid out in bonuses to New
York financial market operators and 9 billion
sterling to London
City bankers and fund
managers. These bonuses are related to stock market performance and
then ploughed back by the recipients into more stock market and property
purchases. This has all the hallmarks of a self sustaining potential bubble
scenario.
What will happen if something occurs to shake the
markets into a negative mode? Not only will the bonuses be cut but
redundancies will increase leading to forced selling in a falling market. I
cannot subscribe to the ever increasing bull forecasts for the Dow and FTSE
indexes.
One of my main concerns is the South African M3
broad money supply which is increasing at the alarming rate of over 20% per
annum with some months up at 25%. This is inflationary which ever way one
looks at it. Couple this to a producer price index that is growing at 9% and
one has all the potential for a really weak Rand.
In addition President Mbeki has intimated that he would like to see a weak Rand in order to bolster the income revenues to the
exporting companies that are dominated by resource stocks in order to create
jobs. As I have stated for the past two years... this is a resources
dominated market. Sure we are going to have periods of correction in an
ongoing bull trend but the long term data is up, and way up for commodity
stocks.
The Rand is
hovering at the R7.20 level with support at R7.05 and resistance at R7.33. A
break above R7.33 will be the trigger for a bout of considerable weakness.
One of the most important charts in the book at this
point of time is that relating to the Rand
price of gold. I have long stated that a true bull market in gold demands
that the bullion price out performs all the leading currencies. In dollar
terms, and also in sterling, yen, Swiss Franc and Euro terms, the gold price
has kicked upwards out of the confines of the trading range and correction of
the past nine months. This has triggered a resumption of the long term bull
market in both bullion and the shares. But there is data to indicate that the
Rand price of gold could well out perform
all the other currency charts of gold.
I detail in the first set of charts my analysis and
forward projections for the gold price in Rands and it is quite frightening. When
bullion was trading at R2500 an ounce I detailed an upside projection for the
Rand price of gold to R5400 and was generally
thought to have totally lost my marbles. Well at R4900 an ounce the price is
almost on target. I am now increasing these projections to R6200 and then to
R8700 an ounce for the long term forecasts.
After a six month correction the resource stocks are
back into top gear and starting to run into their next bull market moves that
should take all the leading metals and oil back to new all time highs. Do you
remember at the start of the year all the commentators talking about the end
of the commodity cycle?
I reiterate my analysis that we are into a long term
resources cycle and that there are still several YEARS of upside moves still
to come in all the resources, including gold.
 
The Rand
price of gold is shown with the Fibonacci retracement
lines. After the bull move from 1999 to early 2002 the price dropped to the
61.8% retracement level in an almost perfect
Fibonacci pullback. This signaled the start of the new
bull trend in which the price is currently residing.
The Fibonacci lines have been added to the
corrective move from 2002 to 2004 and extrapolated to show the upside
Fibonacci levels of 1.618, 2.618 and 4.236. In mid 2006 the Rand
price of gold hit the 1.618 line at R4800 an ounce and corrected. The past
week's trading has pushed this data above the 1.618 level as the price broke
out of its correction into a new bull trend. The next Fibonacci level at
2.618 gives a projection of R6200 an ounce for the Rand
price of gold. If the Rand strengthens to R7 this would indicate a gold price
of $885 and a weaker Rand at R8 would give
$775. The bottom line is that the gold price in Rands is ready for some serious upside
action and this implies that the dollar gold price will also move sharply. This
data also indicates a price rise from the current R148 000 per kilo up to
R195 000 a
kilo. The profit potential for the gold mines is massive at that price and
even DRD will make money at that level!!!!!!!!!!!!
The gold price is shown in the lower chart
with the FT Gold index in the top chart. In 2002 I detailed my first
Elliott Wave analysis of the gold price and going forward from that indicated
a massive nine wave extended movement up to the top of wave 9 in 2006. Where most other
Elliott analysts continually looked for substantial corrections to retrace a
good portion of the bull moves I continued to look for substantial upside
progress to complete the ninth wave format. But during the past year I also
indicated the possibility that there was a difficult correction between 2004
and 2005 that could be a much larger wave format.
My continued Elliott analysis is shown above. I have
come to the conclusion that there was a large 1-2
correction in 2004/5. This indicated that the gold market had entered wave 3. Since the May peak of 2006 the gold
price and the FT Gold index have both been in protracted sideways corrections
that in my analysis are the first corrective wave inside the big wave 3. But the interesting aspect of both
corrections is that they have been weak corrections as the last dip has
failed to move under the first down leg of the correction. Weak formats of
this type lead to very strong forward moves. This was also the case with both
the 1-2 corrections.
My conclusion is that we have just started the wave
3 of the bigger wave 3 and that
this is usually the strongest move in the big bull trend. So relax, strap
yourselves in and go for the ride.
When this analysis is applied to the JSE Gold index
a slightly different picture emerges due to the crazy moves of the Rand up to R22 to the dollar and back to R5.50. These
wild gyrations altered the overall picture. But now that the currency has
settled to a more sedate path the picture has developed into the same format
in Elliott.
The JSE Gold index has also mapped out the
large wave 1-2, but over a
different time frame to the FT Gold index and bullion due to the gyrations of
the Rand. The current 1-2 correction that
has been in the market for the past year has a weak A-B-C format in which the
C wave has stayed above the low of the A wave. This is the same format as the
other two charts and heralds a strong forward move out of this correction. The
whole gold market has moved into the third wave of Wave 3 of the big bull market and should move
strongly this year and take the JSE Gold index to all time new highs at least
50% above the previous high of 2002. I reiterate that this is a LONG TERM
BULL market in gold shares.
In my forthcoming book, 'Essential Technical
Analysis', due out in July I detail at length the interpretation of
oscillators. The FTSE 100 is a classic example of one of the most
important aspects of oscillator analysis and the combination of normal and
reverse divergence. From 2003 to 2006 the FTSE 100 index made new highs and
so did its RSI, indicating a stable bull trend. Then in mid 2006 a reverse divergence
continuation buy kicked in as the RSI made a new low at L that was not
mirrored by the index value. This indicated another upside move to come,
which occurred. BUT although the index has made a new high the RSI has so far
refused to confirm thus setting up the second leg of a classic sell
divergence. This combination of classic and reverse divergence is very common
and has not been previously discussed in any TA book. In my work this is an
essential aspect of trend analysis.
Dr. Clive Roffey
CRoffey@mweb.co..za
“Gold
Action” is a fortnightly commentary on global gold and precious metal
markets produced by Dr. Clive Roffey, Johannesburg,
South Africa, a leading professional independent commentator on gold markets
since 1969.
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