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Potentials
Wherever The Eye Glances "¤
is
the Egyptian symbol for the Sun and for Gold. It is also the symbol for
the Eye.
The general sentiment in the Gold community has been quite tense. Since Gold trading above $400 and touching $430, many are expecting Gold to correct. Gold has indeed been tending lower and testing $400 again. Why the long awaited correction might be almost over and why $400 might be holding as strong support is laid out by the following chart study. This is a translation of what I have partly been writing to my German-speaking readers since the beginning of 2004. Respected Elliott-Wavers are predicting a sharp correction and are feeling confirmed at the moment. I wonder how they will feel if their predictions turn out to be wrong? While only few Gold analysts like Jim Puplava, Jim Sinclair and Bill Murphy remain bullish on Gold, I certainly wonder why the sentiment is that pessimistic. I have been telling my newsletter readers in Germany to remain bullish and not to liquidate their Gold exposures – not this time! I advised them to off-load some Gold shares and to redistribute their portfolios. Gold shares are linked to the physical Gold price, but as this bull market in Gold gets more and more confirmed technically, Gold shares (especially juniors) are moving more and more independently and are establishing individual momentum trends. This makes trading Gold shares differently than it used to be. I monitor about 400 Gold shares from Vancouver, Toronto and NYSE and since gold re-touching $400, I feel like a little kid in a huge candy shop. There are so many Gold shares that look delicious and ready for take-off (into my mouth). Not only Gold shares from the HUI and XAU indexes have been performing explosively the months before. I think that the general sentiment is pessimistic because most investors are acting like humans and humans try to act rational and measure everything they can get into their hands. "There must be a correction ahead, because Gold and Gold shares have been gaining more than 100% the weeks before." John Maynard Keynes is not my favorite economist, but he was a master of crafting witty and insightful one-liners like this one: "Markets can remain irrational longer than you can remain solvent." In 2003, Gold climbed from $343 to $415 (+$72 = +21%). Silver started the year at $4.74 and closed it at $5.965 (+$1.225 = +25.8%), whereas it seems remarkably that Silver surged $1.13 alone in the last three months of 2003, a gain of 23.4%! If one looks at the yearly performance of Gold in Euro, the picture looks totally different: Gold began 2003 with €329.942 and ended it with €332.335 (+€2.393 = +0.7%). Silver was trading for €4.52722 a year ago and is now for €4.73225 (+€0,205 = +4.5%). Calculated in Yen, it does not look as bad: Gold cost 411.507 on January 1, 2003 and 447.02 on December 31st (+35.51 = +8.6%). Silver was purchasable for 5.523 and was sold for 6.391 Yen a year later (+0.868 = +15.7%). Since the beginning of the bull market in 2001, Gold increased its value in Dollar-terms by 66%. The Gold-index XAU surged 175%, while the unhedged Gold Bugs Index (HUI) gained more than twice that much (+400%). This means that if Gold was rising by 1%, XAU-stocks were rising by 2.6% and HUI-stocks by 6.2%. The difference between them is being labeled as “Hedge-Tax.” If one hears something about Gold at all in the broad media world, then it is that it reached a “7, 8, 12 and 15-year-high.” Therefore the interest in going into Golds is already muted, because investors are reminded (indirectly) to wisdom like “Buy low & Sell high” or “Buy when there is blood in the streets and sell, if the champagne bottles are popping.” But even experienced Gold-investors and analysts are taking this into consideration since for quite some time now to reduce their Gold-positions or to liquidate completely – to (finally!) realize profits and to be able to buy back cheap(er) after a correction. As Gold climbed over $400 and cowardly moved to $430 and went down to $400 again, most Gold-shares lost between 10 and 30%. “Gold-shares often anticipate physical Gold price movements. ” Most Gold-investors are acquainted with this phrase and therefore anticipate a sharp, overdue Gold-correction. Since the middle of the year 2003, Gold rose by $66, the XAU by 57% and the HUI by more than 100%. Would indeed a correction not be “overdue” and “healthy?” Answer: “Not necessarily, because everything is relative!” “The Golden sun, full of enjoy and fun, is bringing our boundaries with its glitter bright, a heartenlightning lovely light.”[3] It has to go down so that it can go up.
Between 1996 and 1999 the Gold market was in a downside trend. The two red dots in the above chart are marking a trend-change (with the help of a double-bottom-formation – also called "W-formation"). In November 1999 the Gold price was testing the $250-zone, bounced to the upside to signal a strong future resistance point: $330. According to Cycles-Theory, a new upside trend is being established not until this resistance-zone has been taken successfully to the upside. At the end of 2002 Gold eventually succeeded with the help of an 8-month symmetrical triangle to cut across this resistance zone and become sustainable. Gold took off from its new support-zone explosively by dint of a 125% thrust to more than $375. After that, Gold confirmed the $330 support and said farewell to it by building another symmetrical triangle to break the technical resistance at $380 (and therefore the psychological resistance at $400 as well) akin impulsively. Since Gold was trading at $415, the seldom trend-change-formation "saucer" had been completed after eight years. In general, a "saucer-formation" ("rounding bottom") shows a very slow and gradual change from downside to sideways and then to the upside. Such reversal-patterns can mostly be found in long-term charts. They are per definition relatively "drawn-out and flat," but mark a decisive change in trend at which a bottom is being built over several years. "Flat"? There lay $165 between $250 and $415! A first indication of the above-mentioned "relativity" and how much potential there is still left. Test-Phase Completed in 2003 Although the end of the 20-year downside trend can be related ex-post to January 2001, the new (upside) trend needed to get confirmed a first time by breaking the superior downside-trend-line to the upside at $275 (see green line in above Chart 1; compare (red) symmetrical triangle in Chart 2 below, which used a alternative downside-trendline as the superior leg). After that Gold took the $300 resistance relatively fast and was forming another (8 months) symmetrical triangle (based on two strong triangle-leg-lines – see chart 2 & 3 – to overcome the strong resistance zone at $330.
From the above "Fibonacci M/A" Chart one can see when the new upside-trend was establishing over the exponentially smoothed out price-curve (black) and how important this was. (Since 1999, this curve was tested and marked five times via price-jumps). Not until the beginning of 2002 was the Gold price able to hold above – coincidentally at the same time Gold was going over $300 – which event(s) changed the market sustainable. Since 2001 Gold is moving within an "intact" upside-trend, which was tested, confirmed and encircled various times. Until the break above the 1999/2000 "Confirmation Point" at $330, Gold required 23 months and it was scanning the lowest (dark green) support-trendline (see chart below). The last time Gold was testing this supporting line was in April 2003. Since then Gold took one higher trendline after another. I have been advising my readers that the above blue resistance trendline might turn out to be new strong support for the years to come.
Eminent is the question, what is the significance of what a trendline determines? The answer is two-fold: The longer it was intact and the more often it was tested, the more important it is. A trendline which was tested successfully eight times and thus signaled consecutively its validity is obviously more significant than one which was only tested two times. The more significant a trendline is, the more affiance it infuses and the more important is the new, superior trend. Not until the $330 zone was breached to the upside was the upswing trend confirmed for the first time. The reaction of the Gold price shows this impressively. Gold surged rapidly more than $50 in only eight weeks and touched the highest trendline. Subsequently a last, successful re-test of the $330 support followed (simultaneously touching exactly the lowest trendline). And ever since, Gold took a higher trendline after another. Whereas the (blue) middle line was acting as strong resistance until exactly(!) $400. Since Gold managed to close above $400, it is situated above this multiple-times-tested but scarcely over-jumped withstanding middle line. Gold is testing it at the moment to take it sustainable and for the long-term. Should this happen in the beginning of 2004, Gold would strive to the two higher trendlines with peace of conscience since the lower ones were tested and confirmed sufficiently. Therefore one could argue: The Gold price required three years to level off in between certain boundaries to allege and confirm the (new) trend-direction. The lowest trendline turned out to be the most tested and thus the most significant one. This one now signals if the upside trend is still intact. The middle (blue) trendline acted as strong resistance since the beginning of the bull market and Gold could not hold sustainable above. 2004 could be the first year in which a "role reversal" takes place: Gold is trading firmly above this prominent resistance line which henceforth serves as strong support. Course aim for Gold at the end of 2004 is about $500 according to above chart. Therefore Gold would have risen already by $100 within one year. In 2003 Gold rose by $75 ($325 to $400), in 2002 gold rose by $50 ($275 to $325 (=$50), and in 2001 it rose $25 ($250 to $275). If this $25-yearly-rise was to be maintained, this would result in a Gold price of $625 at the end of 2005, $775 in 2006 and $950 in 2008. If the Gold market rises 10 years, the extrapolation goes to $1625. If one expects Gold to persist in a 20-year upswing (similar to its prior downside-trend), this naïve fallacy projects a Gold price of $5500 per ounce. That such a price distribution takes place is rather implausible, but shows as well how much potential there is left. Any such a scenario does not include "unexpected" (and therefore not priced in) internal and external effects:
Any of these would bring about a price "explosion." [Many think that a "bubble" might occur in Golds. In my judgment this cannot occur in a hard-asset-market – in opposition to soft-assets (everything based on paper and (hot) air; including Gold-shares, -derivatives, etc.]
The chart above shows the important trespass of the $400 and the resultant Buy-&-Sell Signals thanks to the valid (and profitable) trendlines since the birth of this new bull market. Although we are situated in a "Sell-Zone" at the moment, it is important to also take into consideration that Gold has successfully broken the significant middle-resistance-line and could take it as long-term support. As long as Gold is trading above $400, this support-line holds until approximately March 2004. Many Gold investors are receiving a sell-signal right now because they assume that the Gold price will move in direction of the lowest trendline, since in the (young) past this always occurred. It is possible that this new support-line needs to be tested quite some time to retune those investors. Alternatively this could be made by a price-jump to $423, $430 and maybe further to next resistances at $445 and $480. Whatever will be the case: Should this middle-line become support, the Gold price would not be in the sell-zone, but in the buy-zone.
The above chart shows Gold arriving in between a resistance zone which is derived from the price actions from 1990 until 1997. The red line which used to be support in the 1990s is now acting as resistance, while the red line which used to be resistance is now support. If Gold should make it above the red resistance line, then this would set of a new era in Golds. Until now, Gold has only tried to break out and confirm old resistances. I am curious how Gold will be breaking the red resistance line to the upside in the days to come. Either this will be quite fast or with the help of another powerful triangle-formation. According to the next chart, the HUI Index looks like it is wanting to test the 200 points again to be able to strongly overcome the above lying (pink) resistance line.
The following chart shows the HUI Index more closely. The current resistances might be blown up with the help of another triangle which might have been in formation since closing above 200 index-points.
The next chart shows how cheap the HUI is at the moment and that there lies a great chance of picking up oversold HUI shares. If the physical Gold price should manage its way above its strong middle line, then the HUI takes off to do the same.
The long-term picture of the XAU Index shows how much potential there is left in its shares and how important the recent 95 index-points are. If the XAU holds above 95 points and takes this zone as support, then 150 points will be touched in the weeks to come.
Dollar vs. Gold: “Let`s get ready to rumble!”
Because the value of Gold is numerated in U.S. Dollars, this money-substitute influences the Gold price (and vice versa). By the end of 2003 the USD Index was quoting at 88 index-points and lost 26.666% since its high at 120. Gold rose by circa 60%. Therefore, Gold was rising exactly 2¼ faster than the Dollar fell. This is due to the fact that Gold ended its upside-trend earlier as the USD began its. Since the beginning of 2002 (USD still at 120) the USD Index/Gold price could not close above $370 and remained in a sideway-trend ("rectangle") with $330 as the lower boundary. Above shows as well, that the Gold price multiplied with the USD Index is moving within a symmetrical triangle since about a year. This indicates that Gold could (soon) rise faster (again) as the USD falls – if the triangle completes with a thrust to the upside.
The U.S. Dollar rose by 50% from 80 index-points to 120, which highpoint was built with the help of a massive head and shoulder formation. In general, a H&S formation is the most reliable chart-pattern. It shows a change of a long-term trend. The "head" of USD Index helped itself with a "triple-top-formation" and peaked in end 2000, middle 2001 and beginning 2002. At the same time the USD was marking its third top, Gold was standing right before $300. The Dollar slipped to 105 points and between middle and end of 2003 hung on its right shoulder above 105 points – while Gold was trading firmly above $300 and building a symmetrical triangle which ended at the same time as the USD sacked below 100. After that, the Dollar was sliding down to its neckline at 93 points and made a pullback to the (blue) 500-day-Moving Average (Gold re-tested $330 after it was trading for more than $375). After that, the Dollar went under its neckline-support at 93 and made a classical pullback to the neckline, which could not hold. This now means for the USD Index: "Good-Bye 90s and Welcome to the 80s." The H&S formation is not finished yet. The USD just signaled a "Sell" because the decisive pullback to the neckline could not hold. A H&S formation also gives the possibility to roughly calculate a minimum price aim by carrying forward the distance from the "head" to the neckline. Therefore we can calculate with a minimum USD Index of 66 points (120-93=27; 93-27=66). In general this minimum price objective is reached "relatively fast." While Gold succeeded recently to take its middle-trendline as support, the USD fell from its 2½-year supporting (blue) middle-trendline. Should the Dollar not make it above this line in the weeks to come, the USD sinkage would accelerate for the first time since its commencement in 2002. Chart-technically, there is potential for the USD of 66 index-points by the end of 2004. This point may turn out to be significant during the dominant downside trend of the USD.
After 30 months for the U.S. Dollar and 34 months for Gold, the respectively new superior trends should be latched and leveled-up. After such a first "trend-test-phase," prices fluctuate considerably and self-confidently in the direction of the already striked trend-path. Thus, the trespassing of $400-Gold and the shortfall of the 93-USD-Index could have heralded the end of the trend-test-phase. This "crucial event" is supported by the conclusion that both the USD and Gold were touching its middle-trendlines, while breaking its respective price marks. Charts are a great thing, because a picture tells more than thousand words. On the other hand charts are dangerous, because pictures can manipulate. The shorter the timeframe on a chart, the riskier it is to make a prediction and decide to invest or not. The larger a chart is, the more significant it is. Unfortunately, the broad media world never shows the "real" (long-term) U.S. Dollar-development. If long-term charts are so important to localize dominant cycles and to evaluate the tendency of economies and markets, why is the sophisticated financial press and the informative media not showing any of them? Because of exactly this reason, I assume! Let's have a look at a "real" long-term chart of the US-Dollar to make sure in which direction the US-Dollar has been tending:
The Euronuchen-Taler versus Gold The intact bull market in Gold is questioned by European investors and analysts arguing that an investment in (physical) Gold is not lucrative, because the USD is losing exactly the same amount that Gold is gaining. As already mentioned above, Gold could soon rise faster than the USD sinks.
Since for years the Euro-Gold price did not make it above €330 – a resistance-zone, it gives the impression of wanting to get cracked by a symmetrical triangle. A breakout to the top would indicate that Gold rises faster than the Euro. This new trend would stimulate European Momentum Funds and investors to become engaged in physical Gold – an event which would accelerate this Euro-Gold price rise like a self-fulfilling-prophecy. The following chart shows the Euro Index and the current hold above the former resistance zone. Being in Europe, one can catch the general impression that "the Euro went so high that it is impossible to go even further. A correction is ahead. The US Dollar will rise like a Phoenix from the ashes." A long-term chart shows that the current Euro price is nothing unusual and that there is much upside potential left.
The next chart shows the Euro Index against the U.S. Dollar Index. The current drop of the Euro price is due to the rebound of the U.S. Dollar. However, the ratio between these currencies shows that there lies strong resistance ahead which was touched a few days ago. If the blue support zone holds, the break above this red line could be done quite fast. It is possible that this new strong support zone needs to be tested and confirmed for quite some time. The longer the better, because after having done so, this red line will act as strong support zone.
Below one can see the U.S. Dollar Index versus Gold and the landing at major support zone. It will be interesting to watch how this line will be breached to the downside. An explosive triangular formation might help out.
A widely spread and used chart like the one below shows the downside trend-channels in which the Dollar has been moving. Whenever the Dollar was touching the lowest trend-channel, it rebounded somewhat strongly to the direction of the upper trend-channel. That might be one reason why many investors are currently bullish on the Dollar and thus bearish for Gold.
As already mentioned, charts have the ability to manipulate. At the same time one can argue that the Dollar will be moving to 90 index-points and maybe above. One can also claim that the recent USD rise will be over quite soon, because the next chart clearly shows a powerful triangular formation which is just before completion. As every triangle has the same potential of breaking to the up- and downside, triangles sometimes use fake-breakouts to shake-off even more speculators who bet on the wrong side of the market. This is more often the case in heavily traded markets such as currency markets. As shown in the charts above, the USD has reached a decisive point in its charts and the 85 index-points might be blown away with the help of this triangle:
DROOY- Hui or Pfui? A much discussed--but in recent months unfruitful performing--Gold share is the South-African based Durban Roodeport Deep (Symbol: DROOY). In the beginning of 2003 this sound company was trading between $4 and $4.50, crashed in the middle of February to $2.25 and was quoted until the end of the year to maximum $3 (except for one time). Its price-zone is reflecting extensive resistance. Since for a few days DROOY succeeded to move over $3 and since for many Gold-investors the Rand does not give any signals to come down from its (too) high valuation again, some DROOY-owners cogitate to sell into this recent strength. Following charts shall prompt to reconsider any such thoughts.
In the long-term chart one can see the superior resistance lines which resulted out of the high-points in the beginning of the 1980s. In 1994, DROOY managed to overcome the first resistance line which wasn't able hold three years later. Only in the end of 2002, DROOY made it (thanks to enormous increase in volume) not only above the first line, but also took the second one as support. Despite this massive volume, the third and last resistance line could not be taken. Since the volume is now increasing again since the end of 2003, a breakout above this dominant line could occur anytime in 2004, which would not only act as support, but could also at the same time animate for old resistance prices at $10, $15, $20, $30, $40 and $50 in the medium and long-term.
DROOY has been persisting in a triangular formation for two years, which should be (almost) completed since it broke the upper leg a few days ago. Such a massive formation would be necessary to overcome the strong resistance-zone between $4.50 and $5. This zone was marked and tested in the beginning of the bull market in 2002, but could not hold sustainable. The first upside movement from $2.25 to $5.70 marks wave 1 ($3.45). A thrust out of a symmetrical triangle to the upside can in general range between 75 and 125% of wave 1. Therefore we can calculate for the short-term a minimum price aim of $5.59 (75% of 3.45 = 2.59 + 3 = 5.59) and a maximum one of $7.31 (125% of 3.45 = 4.31 + 3 = 7.31). The chart below shows the relative (under) performance of DROOY compared with the Gold price. In the beginning of 2002, DROOY could rise faster than physical Gold, but since its highpoints in June, DROOY was tending weaker than Gold. While the precious metal increased from $320 to $410, DROOY was losing in the same period (June 2002 until end of 2003) from $5.70 to $2.25 and respectively $3. A breakout of this triangular formation means that DROOY will be rising faster than Gold.
Although the rising SA Rand is given as the guilty reason for why SA-Gold shares have not performed that well, there seems to be a trend-change in 2004: Despite a high Rand, DROOY gives signals to breakout from its recent underperformance to catch up. A look at the Rand/Gold price enables room for speculations towards the Gold price and the SA currency. The Rand/Gold price managed to break out of its triangular pattern to the upside and confirms the breakout by touching the upper triangle-leg another time. This leads to the assumption that the Rand/Gold price will mark new highs in 2004.
A look at the SA Rand Index shows from where the Rand has been coming from and where the upswing might end. At the moment, the Rand has been trying to overcome strong resistance at 0.16 points and is building a triangle. Many Gold investors and analysts have been betting for 2004 that the Rand would start to come down from its (too) high valuation, therefore betting that the triangle will break to the downside. Already, the Rand is having difficulties even holding in between this triangle as seen from the chart below.
The strongest currency in the world in 2003 – the SA Rand – could be promoted as the weakest currency by the end of 2004 – an event that would bring about enormous upward valuation potential for South-African based mining companies. Upshot: The Golden Saucer is Ready for Take-Off!
©
2004 Stephan Bogner CONTACT
INFORMATION NOTES Above
charts from www.bigcharts.com,
www.stockcharts.com
and Metastocks. |
