Gold Action #419

Dr. Clive Roffey
Apr 17, 2006

Bullion touched $600 last week and that brought out all the forecasters of $700, $800 and $1000. Once again I must ask why were all these so called experts nowhere to be seen when gold was $250? Usually I am concerned when so many 'experts' forecast big gold bull markets. But in this case I am gratified.

If one subscribes to the Elliott Wave concept of a five wave bull market with three upward thrusts interrupted by two corrections then the psychology fits. The first wave of a new long term bull market is born in despair, doom and gloom. The first leg is greeted with distrust as the fundamentals continue to reflect the previous bearish trend. This is the time when technical analysts are at loggerheads with fundamental analysts. As the new bull market accelerates it reaches a critical mass at which point the new fundamentals driving the market become readily apparent. That is the case at this point of time. Distrust of the dollar as an investment currency coupled with the Chinese and Indian offtake and a rise in global investment demand in addition to rocketing resource and oil prices have pushed gold into prominence as the central pin of the monetary system.

The technicals and the fundamentals fit together and the usual strong third wave ensues on the back of almost total market acceptance of the bullish conditions. The final fifth wave is always the euphoria driven period in which every man and his dog becomes an expert and making money in the gold market is the easiest game in town. This is when the technicals start to show divergences and other potentially negative aspects that are generally ignored in favour of the fundamentals that indicate the run can go on for ever.

We have just entered the area in which the fundamentals and the technicals are in unison. This is potentially the most dynamic period of the long term bull run. It also signifies a complete change in the old concepts of what drives the market and leads to a rash of innovative philosophies about the new market forces. Suddenly there is an acceptance that gold has resumed its role as an investment currency. How many times over the past few years have I detailed the hugely bullish prospects for the gold price against all the leading currencies and especially relative to the world's leading investment currency, the Swiss Franc?

Last week, when the gold price touched $600, the shares did not follow and the bullion price came back to churn around the $595 level. I expect to see an absolute powerhouse in gold shares when the $600 level is breached for the second time. This will be the trigger to push all the doubting sellers out of the market and promote a new gold share rush.

Meanwhile the oil price, as expected, has moved to a new high and should continue to power ahead over the next few months.

If there is one blot on the horizon it must be the Dow. It remains in limbo under 11 500 and continues to churn sideways apparently unable to decide in which direction to trend in the future. This area of investment is best left to its own devices until it has sorted out its new direction. But I will reiterate that once the breakout occurs there is a 5000 point potential move ... in either direction!! But the key investment area remains resources and especially the precious metal shares.

	Silver is well out performing the gold price, as expected. Although the silver price has rocketed ahead during the past few months the RSI has also made new highs along with the metal price indicating that this is a stable bull trend, even though the immediate price is extremely overbought. This data points to much further long term upside potential for silver.
	The Platinum price chart is still inside a bull trend but its relative performance against gold has turned negative. For nearly ten years platinum was the dominant precious metal, now it is the poor cousin and the others are all performing better, even palladium.
	The Brent Crude oil price relative to gold is an interesting chart. The main bull trend in the oil price remains solid and a secondary steeper trend has developed in red. But although the grey relative strength of the oil price against gold remains in a long term bull trend there are signs of a shift in power to gold. Note that the oil price has made new recent price highs that have not been confirmed by the relative strength. This is usually the first sign of a shift in performance towards gold. If this occurs then gold should play catch up with the oil price and the ratio move towards the 10:1 level. Thus oil at $80 a barrel, as I expect, would imply a gold price close to $800.

There is a lot of data in this long term monthly chart of the gold price.

First note the sell divergence in late 1987 followed by the buy divergence in mid 1999. These were classic long term investment divergence signals. In addition the second low in late 2000 was a classic example of what Martin Pring calls the Chinese Torture bottom.

The current price has pushed the RSI to new highs well above its recent highs. This signifies a stable bull trend.

During the dark years from 1996 to 1999 I continually detailed the huge flat top broadening pattern that was developing and the huge potential upside that would ensue form this dynamic formation. The standard arithmetic upside count out of this pattern gave a target of $610 that I detailed long before the rest of the gold world had woken up. This is about to be achieved. But the data looks far stronger than a short range move to $610. In cases such as this we revert back to the Fibonacci levels to establish potential parameters.

I have previously detailed in my Elliott Wave configurations that there was a potential for the price to extend through to $685.

When the Fibonacci lines are applied to the flat top broadening pattern the 2.618 factor also indicates a potential for the price to move close to $700.

But there is another aspect to this data that has caused me to review my long term Elliott wave configuration. For the past four years I have continuously detailed a strongly bullish Elliott pattern, despite all the negativity. This has proved to be correct. I need to review this data in the light of the 2004 / 5 market kink inside the circle.

In my previous Elliott configurations I have detailed an extended nine wave move as the format from the 2000 bottom, with no seriously corrective interruption. My analysis differed from virtually all other analysts as I refused to label the A-B area as the first 1-2 correction. In my analysis the A-B pattern was part of a large double bottom base and not the first correction. The kink in this long term monthly chart made me review the situation, especially when both the MACD and RSI oscillators also confirmed the kink and moved sideways. I must now detail this area as the 1-2 correction. It was a very weak a-b-c diamond pattern that heralded a strong forward bull thrust into wave 3. This has occurred.

Since the acceleration of the bull trend started in July last year the market has moved relentlessly forward. The top grouped oscillators have picked up every sell signal and have just grouped for a buy signal and are nowhere near grouping for a sell at this time, indicating further upside potential. I look at the recent correction from $572 back to $535 as the 1-2 of the next leg. This implies a move to at least $635 as the 3-4 and to around $685 as the final fifth wave of this bull run. Stay with gold.
remain going forward.

	The CRB index of all commodities has only just broken upside out of a two year sideways pattern. There are no signs of any divergence or other danger signals. This implies that the index still has further upside to progress. This is especially relevant to the grains that have been the laggards in this commodity boom.
	The FT Gold index is the most representative index of global gold shares. The point to note about this data is that the RSI in the bottom frame is reflecting the new highs in the index. This indicates a stable bull market.
	The DJIA continues to languish in its potential massive double top pattern. But the grey chart needs no interpretation as it totally underperforms the $ gold price with no signs of any reversal. Stay with gold shares as I have detailed on this chart for the past few years.

Apr 14, 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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