Gold Action

Dr. Clive Roffey
Oct 30, 2006

I have decided to alter the dates of the main publications. I will issue them before the weekend in future as this gives me time off at the weekends that I have not had for many years.

Although the Dow has powered ahead to break above the 12 000 level I am not convinced that this is a breakout into a new bull market. It could still be the B wave of an irregular top in Elliott. The S&P remains well under it previous market peak in March 2000. Until this index also pushes to new high ground to confirm the Dow I will remain sceptical.

The gold shares are brewing up for a major move. After enduring a correction in the JSE gold stocks that stared in January we are, at last, giving all the signal of a major breakthrough. This break will constitute an end to the correction and the start of a brand new bull phase that should take all the gold shares to new highs above all their 2006 peaks. A serious upside breakout should also take the JSE Gold index to new all time highs and break above the 3700 high made in 2002. This is the end of the old correction that has been with us since the start of this year.

Despite the rallies in many of the financial and industrial stocks on the JSE it is still the resources that are the leading performers and likely to remain so for quite some time. This is where the majority of my analysis will continue to be focused.

I have continuously detailed that the resource stocks will be the top performers. I have often analyzed SAPPI, Palamin etc. They are only at the start of their major long term bull market moves after long periods in the ignored dustbin. The New Rand index of rand hedge stocks is ready for a serious upside breakout. But the main breakout data remains in the realms of the gold share patterns. Anglogold has already broken above its short term resistance and Harmony has followed. But the big breakout signal is that for Durban Deep that I have so often detailed. This stock is ready to throw off the shackles of negativity once the price again breaks above R10 and through the final R11 breakout level. This break will signal a brand new long term bull phase.

Before making any investment you must check the relative strength of the sector. If it is not positive against a general market index then ignore the stocks and don't waste your time analyzing them. This is the driving force for my consistent drive towards resource stocks being the main elements of any portfolio be it investment or trading.

Relative strength is also the key to the gold market. For the past few months it has underperformed all the main general market indexes. But there are distinct signs of a trend reversal in this area and I expect to see the relative performance of the gold stocks improve considerably in the coming months.

But one of the main sources of bullishness is coming from the penny stocks, especially the North American gold and silver pennies, of which there are hundreds. These junior miners, developers and mining rights holders are starting to break upside off some serious base patterns that have developed over the past year. These stocks will not move and look so positive unless the gold price moves. These penny stocks are acting as lead indicators for the main gold stock market.

Bullion has been unable to gain a foothold above the $600 level. This is not a problem but a clear signal that the next upside move above $600 will be a major breakout signal. The oil price has in my work also bottomed after a stronger than expected correction. The implication from this data is that it will reverse into a new bull trend to take out the recent highs. This also applies to the gold price.

The bottom line remains the same. Forget about the Dow and stay with the resource stocks for your portfolio winners.

The JSE Gold index is again the focus of my analysis. I reiterate the major correction associated with the I-II move. This correction ended in mid 2005 and heralded the start of wave III. The gold index rose until January this year when it ran into the first minor 1-2 correction in wave III. I believe that the index has completed the 1-2 minor correction. The implication of this analysis is enormous. First it details that wave III has resumed. This indicates that the top of wave 1 in January will be well exceeded but it also confirms my long term analysis that the top of wave I in 2002 will also be exceeded. Do not underestimate the importance of this breakout as after the minor wave 3 and correction 4 there is still wave 5 in wave III to come. This is a massive breakout signal.

Also note that the RSI in wave 1 had no sell divergence. This is a second confirmation of the first wave as sell divergences usually only occur between waves 3 and 5.

The gold bullion price has two distinct trend lines operating at this point of time. The main downtrend is still intact and needs a break above $600 to signal the new upside move. But the second support and resistance trend in red is the key to this chart. This also needs a break above $600. So any move through the psychological $600 level will not only affect attitudes but also signal a serious upside breakout. The other implication is that the May peak will be exceeded.

	The New Gold index has traded inside the triangular pattern for the past few months. This index needs a break above 4500 to confirm the upside breakout. Watch this index for this break.
	Anglogold's relative strength against the JSE Gold index is in grey. During the bull run from mid 2005 it out performed the index and then during the correction from the start of this year it under performed. The data has turned into superior performance once again after the upside break above the R300 resistance that I have so often detailed in the daily reports.
	DRD shows that for the past year it has effectively traded sideways. Yes this has been frustrating and boring. But the grey relative strength against the JSE Gold index is indicating a potential base formation and turn into better performance.
	DROOY is the short term key to the gold market. It has been trading since the start of the year inside a falling wedge pattern that is very close to ending. This boring sideways churning indicates uncertainty but the point is being rapidly reached in which the fundamental become very clear and a new bull market breakout starts.
	Goldfields also has a short term falling wedge pattern at the end of its C wave sell off. A break back above $17.50 will signal the new run. You may not remember that I was continually detailing this stock as a buy under R13 at this time last year. It is a second chance buy at the current price level.
	Harmony has also formed a triangular pattern with similar characteristics to DROOY. There is strong support at $12 and resistance at $15. A break back above $15 will trigger the upside charge and any drift back towards the $12 support is a serious buying area.

Oct 30, 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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