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Consolidation Alive and WellTroy Schwensen The following is an extract from the June 07 Issue of The Global Speculator sent to subscribers on the 6th of July 2007. INTRODUCTION In this issue, I thought it may be an interesting exercise to have a look back over the past 6 months and analyze the respective performances of the Gold price and Gold shares as depicted below:  Now for anyone missing in action during this period to come back and have a look at these numbers, it may result in a yawn at best. The market has gone nowhere. Now if you, like me, have been following the Gold market closely during this period, reading the usual editorials and following some of the regular commentaries, would I be right in suggesting that many of you may have been tempted to throw in the towel? We have read a myriad of negative reports from some quite reputable Gold analysts that the bull market in Gold is over or, at the very least, temporarily broken down. After my last article on Bond yields and Gold shares, I received numerous emails explaining why the Gold price was going sub US$600. We may very well see sub US$600 yet but that is not the point I am trying to make here. Significant trends are not made in a day or even weeks, they take time. It is important not to get caught up in the day to day volatility of these markets. This is a mugs game which is not conducive to rational decision making. The theme of these newsletters over the past 6 months has been one of Consolidation in preparedness for the next major move. When you look back over the past 6 years at the previous consolidation periods, what we are seeing transpire today is no different. Trying to predict the precise timing of these moves can be admittedly frustrating but if you are buying and holding your positions, predicting the exact timing becomes irrelevant. All you need to know is that you are buying during a period that lends itself to value (Which these frustrating periods have a tendency to do) and the rest is up to conviction and more importantly patience. Fundamentally, nothing has changed to suggest this Gold bull market is breaking down anytime soon. Monetary inflation is rampant world wide, the US dollar continues to come under serious pressure, the oil price again finds itself embedded over US$70 a barrel, the ugly face of terrorism remains a legitimate threat (If not exacerbated by the irresponsible actions of our world leaders) and the list goes on. XAU  A look at the chart of the XAU for the month of June 07 shows the XAU attempting to hold support around 134-135 despite a barrage of selling associated with some violent downward moves in the Gold price. In the 5 years I have followed the precious metals markets, I have never seen the Gold sector under such a relentless barrage of negative press whilst holding up as impressively as it has. We have seen significant European Central Bank selling as well as the Swiss recently announcing their intentions to sell gold in the future. I don't like to buy too much into the Gold price manipulation debate, but the fact remains manipulation or no manipulation, history has proven you can not prevent a market (indefinitely) from heading in the direction it ultimately wants to go. On this basis, I would suggest the probability of a break in the stubborn resistance that exists in the 145-150 range over the coming weeks and months remains high. A sustainable gold price above US$700 an ounce is a question of when and not if! XAU GOLD RATIO  June 07 has seen the XAU continue to outperform the Gold price with the Gold price losing US$22.40 and the index just 2.11. The XAU Gold ratio is now at 0.216, up from 0.212, supporting the clean breakout we highlighted last month (Refer to the Relative Strength Comparative section of the chart). Since the last issue, we have had two days where the Gold price has fallen quite substantially (8th June; 5th July) and both the XAU and the HUI index managed gains on both occasions. This is precisely what we have witnessed at the closing stages of previous consolidations and all bodes well for the foreseeable future. At the risk of sounding like a broken record, I remain stubbornly short, intermediate and long term bullish on the precious metals markets. OUTLOOK The two short term scenarios as I see it over the coming weeks and months: Scenario 1: The precious metals shares continue
to outperform the metal to a point which sees a successful break
of both the US$700 mark and the strong resistance in the 145-150
range for the XAU. I continue to support this scenario. Intermediate Term Outlook: Over the intermediate term my next target for the XAU is 165 -170 (Close to the previous high) consistent with the measurement of the present Reverse Head and Shoulder pattern (Assuming the neckline at 145 is definitively broken). After a brief consolidation at this level, we could then see a more extensive rally that takes us to 230 over the latter half of 2007 or early 2008, depending on how long it takes this consolidation to run its course. NORTH AMERICAN SILVER INDEX (NASI)  The Silver index has managed to hold support at the 7,200-7,300 level despite a 7% decline in the silver price over the last month. This strong performance in the Silver shares is demonstrated when looking at the Relative Strength Comparative (Middle section) which you can see has spiked up strongly. The RSI also managed to hold support solidifying my continued bullish stance for the short to intermediate term. OUTLOOK The two short term scenarios as I see it over the coming weeks: Scenario 1: Support at 7,200-7,300 will hold and the Silver Index will rally higher over the coming months. I presently support this scenario. Scenario 2: If the Gold and Silver price were to get caught up in the sharp fall of the other commodity prices and/or a prolonged sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 4,500. Whilst these risks should be considered, I don't support this scenario at the present time. Intermediate Term Outlook: Over the longer term my next target for the NASI is around the 11,000 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends. CLOSING COMMENTS The month of June 07 and early July 07 has seen considerable volatility which has made the precious metals markets anything but dull in recent weeks. We are starting to see the usual division in the Gold community you tend to get around market turning points which suggests to me we are closer to a significant movement one way or the other. At times like these, all you have is your experience and your indicators. I am seeing nothing different to what I have seen over previous years and continue my bullish stance over the short to intermediate term. For anyone interested I write a free newsletter on the precious metals market which you can sign up for at the website below. Troy Schwensen CPA Troy Schwensen
is a full time investor/Trader who spent 8 years in the Accounting
and Finance industry which included roles with blue chip Australian
companies such as Goodman Fielder and Fosters where he spent three
years as a Senior Business Analyst. He made a decision to leave
this industry in 2002 after discovering a long term opportunity
to invest and trade in the precious metals market where he has
since used his analytical skills to build a sound working knowledge
of the sector and its comprising companies. 321gold Ltd |
