Gold Action #414

Dr. Clive Roffey
February 15, 2006

For the past week all news items have been dominated by the uproar caused by the Danish cartoons of Mohammed. The questionably delayed violent religious reaction coupled with the bounty of 100 kilos of gold to the person killing the artist and 5 kilos of gold to persons killing any Danish or German soldier has dramatically highlighted the differences between the laissez faire attitudes of modern Western society relative to Middle Eastern religious fervor.

An age old philosophical clash has again been forced to the debating surface and has regrettably risen to every day news prominence. The state vs religion conflict that dominated the Middle Ages has again raised its ugly head.

In Egyptian times the Pharaoh was both the head of state and the direct deity. Thus there was no debate about the prominence of either concept. In the Greco-Roman period the state was the most important aspect with the worship of the various gods being a personal matter that took second place and was subject to the rules of state. Most of the famous Greek philosophers featured this debate in their writings.

During the Dark Ages the Catholic religion forced its way to the forefront of political power with various Popes approving or even excommunicating kings and emperors that refused to bow to the dictates of religious dogma. Popes were able to raise armies to attack delinquent regents. Religious domination reached its peak during the Spanish Inquisition. During this time religion was the primary power and the rules of state were for the most part subjected to the dictates of religious dogma.

King Henry VIII put an end to this period of history by declaring that he was the ruler of England and that subjugation to the Pope was a secondary matter behind loyalty to the state. This was the beginning of the Church of England that has ever since been subject to the rules of the state. Most European and Western countries have since adopted this hierarchy and inscribed it into their constitutions that clearly put the matters of state above the dictates of religion.

Now we are faced with the consequences of a religion that appears to put itself above the rules of state. This was forcefully detailed in a BBC survey after the London bombings in which the majority of Moslem people polled stated that they considered themselves to be religious Moslems first and only British citizens second. This clearly showed that as far as they are concerned their religion is the prime motivator. If this is the basic philosophy of these religious people it can only continue to inevitably lead to further conflict with Western democracies that put the rules of state above the dictates of religion.

The events of 9/11, the Madrid train and London tube bombings coupled with the suicide bombers in Israel are merely the tip of an horrific philosophical iceberg that can only lead to further Titanic consequences.

The reason I raise this subject is to reinforce the concepts of Elliott Wave theory. I believe we are into the ultra long term wave V of the movement of the gold price that commenced in 2000. Wave III from 1969 to 1980 was driven by the effects of inflation. Elliott indicated that the driving force in wave V would be different to that in wave III. So far wave V has been dominated by the resources cycle that, due to Chinese demand, has rocketed every metal price skywards. But it looks as though Western latitude relative to Middle Eastern dogma will have to factored into our future outlooks for gold. This clash is not going to disappear and as far as I am concerned is likely to escalate as Western nations will only tolerate attacks on their democracy to a limited extent before retaliating.

Whilst all this may be good for the gold price it is not conducive to comfort zone living.

	The $ gold price has been subjected to some violent moves during the past week. But the technical picture is clear. There is a strong support level at around $547 that must hold if the bull trend is to continue. But there is also a potential head and shoulders top pattern brewing in which the $548 level is the critical neckline. A break under $545 would lead to a drop back to $525. Watch the critical support level.
	The $ versus the rand chart has broken downtrend and is forming what appears to be a base pattern. There is support at R6.02 and at R6.07. If the currency bounces off these support levels and breaks back above the R6.15 level then we can expect a much weaker currency going forward.
	The Dow remains trading in a critical area. The major resistance at 11 000 is still impeding progress whilst the support at 10 600 is holding up the value of the index. These are the critical levels. Above 11 000 will be very bullish but a drift under 10 600 will be bearish. I continue to remain on the sidelines until the breakout occurs.
	The FT Gold index is probably the best global gold index as it reflects prices from all the major gold producing areas. There was a sell divergence in late 2003 that led to the 18 month sideways churning. But the recent surge in the index has also been reflected on its RSI. This indicates a stable bull trend. In the short term it may be a little overheated but there are no signs of any sell divergences. Thus I must regard any pullback in global gold stock prices as a continued buying opportunity.
	The Gold Bugs index (HUI) has the identical picture in which there was a sell divergence that signaled the sideways move in 2004. But the recent surge in value has again been mirrored by the RSI. This is a stable bull market.
	I have always maintained that a true bull market in gold stocks must be reflected in the relative strength of the gold indexes relative to the bullion price. The stocks must outperform bullion for a true gold market. The FT Gold index has broken a long term 15 year trend line. And so has its relative strength against the bullion price in grey. This is another confirmation of a true long term bull market in gold stocks. The same data applies to all the leading gold indexes.
	The JSE Gold index is compared to the Rand price of gold. In this case there are two scenarios. The first is detailed by the black very long term trend in the top frame that shows the shares under performing for the past 20 years. But this trend is ready to break into a new long term upside trend. Then there is the shorter term red trend that has been broken in favour of the shares out performing the Rand gold price.
	I previously detailed the upside breakout on the Angloplatinum chart. It has powered ahead. But is now into extremely overbought territory. However note the sell divergence that took place in 2000 and then note that there is no similar sell divergence at present. This is a stable bull trend and I will hold through any corrections until a sell divergence materialises. This is not likely to happen for several months.
	The same picture applies to Anglogold Ashanti. The share price has hit new highs and is into over bought territory. But there is no sign of any sell divergence. I look to hold onto this stock for the full stable bull run.
	DROOY is involved in a major battle between the sellers at the huge $1.80 resistance and the support buyers at $1.45. There is no sign of any sell divergence and I must be a buyer at any price under $1.50 as once the $1.80 resistance is broken this much maligned stock will run.
	I previously detailed the upside breakout above the wave I peak on the Goldfields chart. It has powered ahead. But it is also into overbought territory. This is a stable bull trend as there is no sign of any sell divergence and I will hold through any corrections until a sell divergence materialises.
	Harmony has this week's most interesting chart. It has hit the top of its 2002 peak and is ready to confirm the breakout into wave III. Once again there is no sign of any sell divergence and this remains a stable bull market.

February 11, 2006
Dr. Clive Roffey
Johannesburg
South Africa
email: info@utm.co.za
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"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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