.. Gold could be "Refuelling" for the next run Victor Hugo Market Strategy 25 March 2003 Investors are anxious about missing buying opportunities or being caught holding gold shares if gold dumps. They ask what the technicians say. Others ask what the fundamental analysts say. Still others want to know what the cycles say. My approach is to use what I call "Relativity Analysis" -- which looks at the relativity of technical, fundamental and cycle inputs. Recent comment from a bank says "....While technical analysis is less than reliable in the current highly volatile markets, as price movements being driven by geo-political factors, it is worth noting two key levels for chart watchers, the 100 day moving average on the Gold price at $342.25 and the 200 day moving average at $328.75 -- and these long-term technical indicators suggest the near term trading range for Gold." I first want to say that it is a nonsense statement to suggest that technical analysis is less reliable or more reliable depending on the volatility of the market. One of the primary functions of technical analysis in all markets, volatile ones as well, is to assess volatility and key levels relative to that volatility. A useful technical analysis should also comment on relevant ranges, the quality and direction of trends in various time frames and prospects of reversal or trend continuation relative to momentum acceleration points. When looking for direction on gold, I like to do technical analysis on near month Comex Gold futures prices -- because they are so actively traded - in this case, the April contract GC03J. I notice volatility since 7th March - often associated with a developing market turning point, perhaps on a 25 day trend test - to up. It can also precede a trend continuation pattern i.e. scope for acceleration of the downtrend established since 5 February, leading to a longer term reversal. What the piece quoted above was perhaps emphasising, was that the $342 to $328 zone is being carefully watched investors for evidence of a reversal to up or an acceleration of the downtrend since 5th February. The question most investors have, is whether the medium-term (e.g. 200 day) or long-term (e.g. 2 year) trend will stay up or is it about to reverse to down? The answer is that until a trend turns, the technical analyst and technical traders usually assume that the trend will continue until there is evidence that it has changed direction. There is still little evidence that the medium-term 200 day and long-term two-year trend has reversed. The quality of the longer up trend is still excellent. The 100 day trend may have turned down though - but still has to corroborate forthcoming direction One way to look at the recent pullbacks is that it is merely a "refuelling" phase before the next Gold price push -- much like the pushes of last year and this year. Consolidating price action or a sequence of swings and higher prices, suggesting a trend developing above $342.30 then $348.80 - would signal scope for renewed upward acceleration. If the Gold price pushes above $348.30, some technical analysts will typically begin to remember their own medium and long-term projections. These still suggest scope for the Gold price to be near or above $500 within a year or two. Evidence would become increasingly more persuasive, for a medium or long-term reversal to down or more delays before the next big upward run - with every $ and every day that the Gold price falls below the low of 13th March at $332.00. Gold investors deciding whether they need to be buying or dumping can watch whether key fibonacci derived support levels fail. More important levels are at $327.50 and $321.80 or $314.90. "Failure" of a support level can be indicated by price action penetrating a level, subsequent swings and investor behavior around the level. Basically one has to assess the quality of conviction displayed by market participants - when the gold price trades at the level in question. Conviction can be expressed by the speed of intraday price movement near the level being watched, the extent of that price movement - and also the volumes traded relative to price movement and time. There is some subjectivity involved, but technical inputs help to add objectivity. Of course JSE Gold shares are directly affected by the Rand's performance. Space limits this discussion, but while above R7.90 to the US$, the Rand has scope on momentum swing factors to probe resistances at R8.65 or R9.15 which would help gold shares. Below R7.90, there could be more near term pressure on golds. Next step is to look for cycle evidence. Contrary to some technical dogma which prefers to look only at price relativity, I add another test -- the relativity of price and volume movement to cycles in various time frames. Accept for the moment that there is a gold cycle of typically 18 - 21 years. The price action of gold between 1980 and end of 2001 corroborates that the last 21 year down phase ended in 2001. Even the most discerning among the cycle sceptics will accept that the gold price can be strong for more than four years from 2001's lows, i.e. to 2005 and longer, perhaps for even 21 years - although there can be big setbacks and consolidation phases along the way. The fight for dominance among shorter time frame cycles always sparks debate and confusion among cycle analysts as they struggle to understand the scheme of things. Yet the 25 week and 18 and 36 day cycle is also supportive of a strong upward move any day now. Interesting that this is so, just as war risks escalate and questions about sustainability of rallies on Wall Street increase. A weekly sine cycle study supports a weaker Rand - between now and at least mid -June. Also good for gold shares. Finally, I look at the so-called fundamental factors. Pressures on the global economy and pressure on the US$ and supply vs. demand for Gold. I have written about these factors at length before. For years, popular belief has relegated gold to the status of a curious relic of history. Since about 1996 central bankers, bullion dealers and traders have been net sellers and short traders of the yellow metal. They believed that the US$, stock markets, bonds and property were better investments. In the bull market from 1988 to 2000 while the US economy was strong, they were right. Yet a lot has changed since then. I believe the rocket beneath the Gold price will be lit when the realisation spreads that the US is in a debt hole and won't grow out of it quickly. Both deflation and subsequent inflation can support gold. Damage to confidence in the current economic and geopolitical environment -- for whatever reason -- can lead to investors dumping US assets and to a global depression similar to the 1930's. The US Federal Reserve cannot continue to print trustworthy money whenever it needs to, whether in the form of uncontrolled government spending and trade deficits or otherwise. National, Federal, corporate and consumer debt is at the highest level in history. This wasn't a problem while the US and global economy were growing - but now the problem is slower growth. Consumers are having to deal with unemployment and debt. Wall Street at 29 times earnings is vulnerable. Bear markets tend to end somewhere between earnings of 7 and 11. A Wall Street selloff implies risk of a collapse of other asset class prices not only in the US, except gold. On top of the dire US debt and slower-growth problems, geopolitical factors and weak economies in Europe and Japan add to the risks of a financial panic or stock market capitulation. Despite the debate last year - a selloff phase typical of a mature bear, has not been reached on Wall Street yet. From its 1929 top the Dow fell 89%. The Dow is now only 29.6% below its 2000 highs. Although war successes may provide some temporary relief to confidence - Iraq and terrorists can also produce shocks such as nasty gadgets hurting the UK or mainland USA. History has shown many examples of gold price rises when confidence fails. Currency values become suspect and typically only then is it remembered that in intense times, gold also has a function as a medium of exchange. The relative analysis of technical and cycle and fundamental evidence corroborate: a long term gold bull is underway and the current pullback is a dip buying opportunity. Even a stronger Rand will not deter the scale of gold run many indicators say is coming. Victor Hugo March 25, 2003 Victor Hugo is a Trend and Cycle analyst for www.HugoCapital.com and www.sagolds.com 321gold Inc Miami USA