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Gold Action #437Dr. Clive Roffey 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. Feb 18, 2007 'Gold & Silver Penny Stocks' is the sister publication to 'Gold Action' and is produced by Dr. Clive Roffey; croffey@mweb.co.za
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