Gold Action #421

Dr. Clive Roffey
May 29, 2006

It appears that one of compulsory attributes for the post of would be President or Prime Minister is So comrade Zokwane, president of the National Union of Mineworkers has, in support of Jacob Zuma, confirmed that the left wing COSATU unions do not "adhere" to Judaic / Christian principles and they "do not listen" to the ten commandments. He specifically referred to adultery. I presume that this also extends to "Thou shalt not steal" and "Thou shalt not kill". No wonder with such blatantly outdated Marxist immoral precepts South Africa is the rape, AIDS, murder and theft capital of the world.

A month ago I sent out an extra report detailing all the leading global equity indexes and the huge number of sell divergences that were evident. Since then we have seen a sudden sell off in these markets. It is difficult for me to become bullish on global equities and I must look for any upside reaction to be classified as merely a rally in a new ongoing bear market.

But the data for resource stocks and particularly gold shares is the exact opposite. Whereas for the past few years the general equities have been forming major potential top patterns with sell divergences the resource markets have been in bottoming patterns and are ready for some further serious lift off. I classify the recent dip in resources as a necessary correction to cool off a very overheated situation. I rate this as a correction in an ongoing bull market that will take resource shares to new high ground.

The gold price rose some $45 above my oft stated count target of $685 and then fell $45 under this to react. This is a typical swing in the gold market. What ever level the price reaches above the target so will it correct under the target. In my work we have completed an Elliott Wave Irregular top in bullion with the classic killer C wave sell off. This has completed and the next bull movement should start right now. My target for the next phase is $850 with a possible extension if the trend is powerful to $930.

In the meantime who would have thought that DRD was a classic example of a bull market. The reverse head and shoulders pattern is ready to break upside and catapult the stock to my target of R21 from its current R10.50 for a 100% potential gain. The same picture is shown by the chart of Harmony.

For the pat few months the gold shares failed to make new highs with the gold price. This divergence has ended in my analysis. I am now looking for the gold share to resume their roles as the market leaders and to out perform the gold price in both Dollars and Rands.

I do not apologize for ignoring the general equities in my analyses and for focusing on the resource sectors. Take a good look at any relative strength data and you will see that resources are where the market strength lies, not with general equities.

For some time I have looked at the Rand chart as a major double top pattern in which the R5.95 was the topping out area. I have continuously analyzed that a break of the R6.18 resistance would lead to a sharp weakening of the Rand against all major currencies. The collapse from R6.05 to R6.65 in a few days is exactly what I expected. I am looking for a period of relative stability for the currency at the R6.50 level and not for further immediate weakness although there is an eventual probability that the R6.85 level will be tested.

The financial managers are so under weight resources and hugely overweight banks and retailers that eventually they will be forced by lack of performance to increase their exposure to the gold market. That should provide the real performance ratings.

I rate the current gold and resource price levels as serious buying positions for a powerful upside move into the top of these markets by the end of the year. The next six months could be the most gain orientated period of 2006 for investment portfolios with a heavy gold and resource exposure.

Since the large double bottom pattern in 199 to 2001 the $ price of gold has made a continuous series of new highs as would be expected in a bull market. Since the middle of last year the price accelerated. The whole point of this analysis is to point out that the RSI in the bottom frame has made a series of new highs commensurate with those on the bullion price. This data classifies it as a stable bull trend. There is no sign of any sell divergence. The implication is that the recent gyrations are merely a minor correction in an ongoing long term bull market.

I have updated my Elliott Wave analysis. I was expecting a run through to minor wave 9 to complete the rise from the middle of last year. This ensuing correction has completed the 7-8 major correction in the current large extended nine wave bull market since 2001. There is still one more wave to come in this bull run that should, in my analysis take the price above that of January 1980 and the $850 peak. I am looking for around $930 on bullion to complete the first massive bull leg of a long term major bull market. This is the final euphoric wave in which I expect to see every man and his dog become experts on the gold market and levels of well above $2000 an ounce forecast. This is the wave in which financial managers at last become bullish and the unwary are sucked into the easy profits right at the top of the run. I expect to see at least a 100% appreciation in the gold shares. I expect to see serious ell divergence materialize at the top of this run. Until then remain fully invested in this gold market.

	The Brent Crude Oil chart has formed a series of new highs since November as it rose from$55 to $74 a barrel. This is typical bull market behavior. But look at the oscillators. They have mirrored the new highs of the price into new high ground. There is no divergence sell signal similar to the one in August. Until this materializes I shall remain bullish on the oil price.
	For some time I was been discussing the Dollar / Rand resistance level at R6.18 that held the second bottom of the double bottom in place. In the last issue I detailed that the upside break above this level "should send shivers down the spines of importers". The critical element of the Rand is the resistance at R6.85. This is a long term resistance but the major two year buy divergence for the dollar is likely to force the Rand above this resistance and into new weaker ground for some time to come.
	The Rand price of Gold has also accelerated away. In this case it has shot well above the previous R3700 and once level. I have continuously detailed that I had an upside count to R5400 an ounce. Although this was ridiculed a year ago I am the one who is smiling. Once again the new highs on the price have been mirrored by the RSI oscillator. This remains a stable bull market.
	The Platinum price is also in a stable bull trend as the RSI has moved to a new high with the metal. There is a major support level on the RSI that traditionally is broken on the correction before the final top. There is no break in sight and I must look for a continuing bull trend in this metal. There is no sign of any sell divergence such as that in early 2004 that led to the two year churning pattern prior to the acceleration.
	The price of Silver was continuously detailed whilst inside the triangular pattern. I analysed the breakout and the upside catapult potential. Once again the RSI has mirrored the moves of the metal price to new highs. This is also a stable bull market trend with no signs of a sell divergence. Stay with all the precious metal sectors.
	The Gold vs Oil chart has a reverse head and shoulders pattern that indicates further upside potential in favour of gold. I expect to see the gold price outgun the oil price in the coming bull market phase.
	The Dow has pulled back to test the long term support level at 11,100. I expect a bounce off this level. BUT if the index rises to around 11,300 and then falls again it will have mapped out a head and shoulders top pattern. There is a second and final support at 10,500 that represents the last stand for the Dow. If the Dow goes under 10,500 then a major bear market will ensue.
	The NASDAQ with its rising wedge formation does not breed confidence. The index has broken under this pattern and any upside move will be regarded as a bear market rally unless it can push through to a new high. This is a potentially dangerous pattern.
	The S&P has a slightly less dominant wedge formation. The index has pulled right back to test the lower support level. There is a critical support at 12500 that must hold if this pattern is to remain bullish. A fall under this support will be nasty. The RSI long term trend remains intact but a break under the supports on both the index chart and its RSI will indicate a serious trend change into a bear market.

May 28, 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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