The Wind of Change
Gold versus Dollar

Stephan Bogner
www.silberinfo.de
13 April, 2005

"The wind of change blows straight into the face of time like a stormwind that will ring the freedom bell." (1)

To evaluate the short- and medium-term movements of the price of gold (POG) more efficiently, the super ordinate trend pattern, which can only be found on long-term charts, might help.

After the POG rose 23-fold in the 1970s, a 20 year sideways consolidation period began. This movement took the shape of a triangle. Chart-technically, a triangle is either a continuation or correction formation. If a price fluctuates between the boundaries of increasingly tighter sloping trend lines, the compression between "bulls and bears" is as well increasing. The consequence is that the price either explodes or crashes near the apex of the triangle ("Thrust").

Another, but in regards to the "mysterious" gold market even more interesting, typical characteristic of a triangular price formation is that because of the relatively low trading volume at the end of the triangle only marginal funds and/or market influencing news are required to steer the price towards a certain direction.  

In the middle of the 1990s the upper leg of the above triangle was broken ("breakout"). The price level which was marked by the breakout is a decisive and final resistance in the future (in case of a final correction to the apex). When this resistance will be passed during a thrust, the final upswing to the minimum price goal will take place: To the highest price marked by the triangle. For the POG: $752.

After a breakout occurred, the price can start rising sustainable immediately. Oftentimes the price corrects a last time to test and mark the former resistance leg as new support. Such a "pullback" might have the result of having pushed out "the last weak hands" what must be supportive for the new trend.

During a pullback the price often moves exactly to the apex of a triangle from which point the price acceleration starts either to the up- or downside. Regarding the gold market it was the announcement of the "Washington Agreement on Gold" (central banks collectively limit their gold sales) which ignited the thrust to the upside. Perfect timing or coincidence? Be that as it may, the POG is in an uptrend since then. To make this new trend sustainable and being able to rise to the minimum price goal, the POG needs to take the resistance, which was marked by the previous breakout, as support. The POG is trying to do that at the very moment. The question now is if the POG succeeds directly or if there will be a "small" correction to the lower green support line whereupon a breather the price will attack again.

The micro-macro-thesis claims here that medium-term and even intraday price movements preferably take the same formation pattern that dominates the superordinate picture.

If we put the thrust since 2001 under the magnifier one can see 5 resistance legs (violet) at which the POG was consolidating for quite some time. Every time when the price was breaking such a resistance (breakout) it was correcting back to this new support (pullback) whereupon the price rose sustainable. During the pullback the price fell exactly to the intersection of the violet leg and the 300 days moving average curve ("MA"). During the last pullback the 300 MA touched the 200 MA curve for the second time. As long as the 300 MA slopes above the 200 MA curve, the medium-term uptrend is still intact. (ZE stands for time unit)

Within the volatile price movements since the end of 2003 a triangular pattern can also be found as follows:

• Ideally there are 4 waves within the boundaries of a triangle before the impulse movement (wave 5) starts. This final wave forces the price to break one of the legs to be able to break out and rise sustainable.
• If the POG is not moving to the lower green leg and finds lasting support at the red one, the price will have moved within the perfect symmetrical (red) triangle (same angle of the legs to the green-dashed line in the middle). In this case, the price retracement at the green "2" was only a neglectable overreaction.
• But not only because of the RSI- and MACD-Indicator, which both still have room to the downside, one shall take a correction to the lower green leg into account and not overreact during such an event.

Because during a triangular price formation it is not possible to predict in which direction the price will finally thrust and because the POG still has potential to the lower leg at $418 at the moment, it might help to have a closer look at the Dollar as the Greenback apparently seems to influence the POG in a dominant fashion.

• The strong losses of the Dollar at the end of last year was the result of a to the downside thrusting triangle.
• The Dollar fell below the previous strong support at 85 index points.
• The Dollar pulled back to this new resistance at 83.35 points which wanted to get marked as such for the future.
• Thereafter the Dollar fell but with a higher low and the 85 points were touched a few hours ago.
• The RSI-Indicator already shows an overbought and therefore overheated market.
• The Dollar might further rise to its 200 MA curve, from which resistance it might fall the downside.

Because the Euro has not yet established any self-derived dynamics (momentum) and virtually correlates perfectly negative with the Dollar, the picture of the Euro looks almost laterally reversed:

• The Euro recently fell to strong support.
• The RSI is in the oversold area.
• High probability that the stochastic along with price will start trending to the upside soon.

To assess better how the Euro, Dollar and POG might behave, one takes a more long-term picture into the hand.

The entire development of the Dollar since the new millennium was fluctuating in the protective boundaries of a triangular price formation which basically is nothing else than a "sideways consolidation". A "real" crash therefore is yet to come. 

The "core" triangle is the blue one at which after 4 waves the impulse movement noticeably started as the lower leg was breached. But a sustainable crash did not occur. The Dollar always managed to get back into the triangle until wave 8 broke the upper leg. This breakout along with the violations of the lower (blue) legs generated the superordinate red triangle which now after 4 waves started the impulse movement that a few hours ago broke the upper leg. The Dollar can explode or crash any time now. It's also possible that in the meantime a final pullback to the direction of the apex will occur. The violet triangle shows an area in which a possible breakout might go to. A fall back into the triangle can occur any time as well - as within the boundaries is yet enough potential (in form of volatility) to let the Dollar thrust to the up- or downside. A definite sell signal can only be generated when the lower leg is being breached. Slowly the first are listening to speculative signals which can push the Dollar to a breakout to the upside. The general sentiment for the Greenback in the broad gold and dollar analyst-camps are rather bullish. Will the "last weak hands" being now pushed out of the market with a breakout to the upside before a sharp pullback to the apex and a potential further crash?

The POG as well is moving in between triangular boundaries since the beginning of its new trend.

• After 4 waves the impulse movement broke the upper leg and was able to hold on it for some short time but the price fell back into the triangle from where new attacks were launched.
• At the end of 2004 the upper leg was broken again. This breakout as well was marking important future resistance: the red trendline. As soon as this resistance has been transformed into support, a "strong" move up shall occur.
• In contrast to the Dollar, the apex is very near. This means that the POG must decide shortly in which direction the new trend will start.

Because the Dollar is ostensibly influencing the POG in a dominant fashion since the beginning of its downtrend, it might help to take a long-term chart of the Greenback into consideration to be able to judge better in which direction the Dollar and therefore Gold might tend to in the medium-term.

• After a "strong" 3 years correction the Dollar is now located at strong support which originates from the 1990s.
• The Dollar has been moving within a massive Head and Shoulder Formation (HSF).
• The consequence of a HSF is that the price crashes below the neckline. Oftentimes after a first retracement below the neckline there comes a pullback to the neckline whereupon the price will fall sustainable.
• The possible necklines were successively broken as per the rules of HSF (firstly a small crash below the neckline, then pullback, then strong crash)
• At the moment the Dollar is at its "last" neckline at 80 points which is a horizontal one.
• From this point many analysts are predicting a long sideways movement ("recovery" or extensive right shoulder)
• Not until this support has been breached the Dollar will fall sharply.

The (market) value of the Dollar calculated in terms of Gold is as well moving within a HSF. The difference is that the final trend is already in sight.

• The lower neckline is already breached!
• A first breakdown occurred along with a subsequent pullback to the neckline.
• A sustainable crash to the downside can occur any time from now. This would mean that the ongoing trend since 2002 (one needs fewer and fewer ounces of Gold to buy one paper Dollar) will not only continue but accelerate.

As generally known, the POG is numeralized in U.S. Dollars whereas the opinion apparently dominates at the moment that if the Dollar gets "cheaper" the POG "automatically" gets "more expensive" by the same amount but i.e. towards the Euro stays the same. This peculiarity of the POG makes some analysts feel uncomprehending when colleagues philosophy in a pessimistic manner about the collapse of the financial system and provoke the beginning of "the Ultimate Gold Boom". The Dollar has lost more than 30% of its value in more than 3 years and is located at the strong support level of the 1990s. Despite the many sound arguments for a further depreciating Dollar it might recover for some time now after the strong losses and consolidate sideways before a next move down must occur. The reverse conclusion is that the POG will be doing exactly the opposite: firstly it will fall further and consolidate volatile sideways. This conclusion is correct but - deliberately or not - one important sentence is set aside: The POG can rise hand in hand with a strong Dollar. The POG is not only influenced by the Dollar but by many factors and a dominance of the Dollar can not be lasting forever.

If we take a look at the Euro-Goldprice one can see the complaining Europeans about a gold price that was not at all in a boom but moved in a most boringly fashion sideways.

If the POG breaks the dominant price influencing power of the Dollar, one can see this event (still) at the Euro-Goldprice ("still" because the Euro has not (yet) established its own momentum and correlates virtually perfectly negative with the Dollar - which trend also is not lasting forever as the European Central Bank might wish a depreciation as well - should the Euro rise to a general "economic-damaging" level). 

• The Euro not only is moving sideways but doing so in a triangular formation fashion.
• 4 waves are already finished whereby the impulse movement started which is trending to the upside without having breached the lower leg. This is a first bullish signal.
• The Euro-POG must break the upper leg with the current wave whereupon a strong and sustainable rise would be the result.
• By having finished 4 waves, the Euro-POG might be already in a sustainable boom phase meaning that the Dollar-POG has already decoupled itself from the dominant influencing power of the Dollar. Because there are no signs that the Euro is decoupling itself from the Dollar, it only can be the POG which is breaking the Dollar chains.

The POG correlates nearly perfectly negative with the Dollar whereby the Dollar is dominating the movements. That's why one needs to look at the Dollar if wanting to make a statement about Gold. This (seemingly automatic) approach became a trend within the analyzing gold camps. But the danger of a trend is that there can be a new trend.

Remember when the Dollar started its new downtrend?

Correct: In the beginning of 2002:

But the gold price began its new uptrend already in the beginning of 2001.

Remember what the (daily) dominant gold price influencer was between 2001 and 2002?

Correct: It was the falling U.S. stockmarket.

At the bottom of the above chart (but as well on the full chart below) one can see the POG relative to the Dow Jones since the end of 1999. Between 2000 and 2001 the movements of the POG and the Dow Jones were balanced and thus trending sideways. This sideway consolidation stopped with the beginning of the stockmarket correction. The POG rose on days when the stockmarkets fell and fell when the stockmarkets rose.  When the Dollar began to fall in 2002 as well, the POG accelerated even stronger.

• The POG is consolidating again sideways against the Dow Jones since the beginning of 2003 meaning that in tendency they move equally.
• It was no unusualness that the Dow Jones rose sharply in 2003 hand in hand with the POG. The reason for the rise of the POG was found with the depreciating Dollar.
• But now the Dow Jones could - once again - dominate the movements of the POG. Namely the POG relative to the Dow Jones is located - as in the beginning of 2001 - at the end of a triangle.
• The price already starts rising. Another explosive thrust is probable.
• Beware that a pullback to the apex is always possible and that there is still some room left.

To evaluate better if this relative POG rather thrusts to the up- or downside, firstly we take a closer look at the Dow Jones:

This (still) popular stockmarket index is moving in a sharp uptrend since 1980 which paused after 20 years in the beginning of the new millennium and consolidated sideways. The "crash" was relatively seen rather a correction to the (green) long-term uptrend channel. A "real" crash might yet to come as enough potential exists because the sideways consolidation was in the form of a triangle. The lower leg is currently running close to the 10,000 points. If this upward trend is being touched, then 4 waves will be completed within the boundaries. The index can then start crashing any time. But it also can move up again and breach the upper leg, break out and pull back to the apex from which point will be decided if a sustainable boom or crash will occur.

To judge the state of the stockmarkets better, let's take a closer look at the Dow Jones first:

• After 4 waves the lower leg had been breached in March and the index began to fall.
• The 10,000 mark important psychological support probably at the same time with the long-term uptrend channel (see chart before)

Now let's take a look at the long-term value of the Dow Jones calculated in Gold (Dow-Gold-Ratio), where one can see 3 overreactions (Hype, Crash) relatively to the (grey) long-term uptrend since 1900. Every hype corrected all the way down to the grey trendline. The hype of the 1980s and 1990s is still not corrected fully when compared to the previous two.

To evaluate the time of a potential next crash, we will take a closer look at the last hype since the 1980s:

• The formation of the top took 3 years.
• The strong retracement took place in 2001.
• The current sideways movement lasts now almost for 3 years and is increasingly pressured by the red and green trendlines to decide for a new trend.

Now if we take these 2 consolidation periods closer under our magnifier, one can see similarities:

Relative to the Nasdaq, the POG is as well at the end of a 2* years sideways consolidation as the upper leg has been broken recently:

The Nasdaq itself is already falling down of a triangle since the beginning of 2005:

• In April there was an intersection of 3 trendlines and the index touched it from the downside what can be valued negatively.
• Only if the Nasdaq closes above these 3 trendlines and breaks the upper leg a bullish signal would be generated.
• After 4 waves within the violet triangle the impulse movement can breach the lower leg any time and let the index crash.

The following 3 concluding stock charts might reflect the current state of the popular stockmarkets:

• The accounting scandals take a change in trend: Financial statements are not only manipulated to the upside but as well to the downside: Possibly out of fear that their renunciation of their core business towards speculation in the derivatives market could be noticed. Taking then a closer look at these numbers would probably show how the financial market worldwide (thanks to the globalized markets) is endangered because of their excessive exposure in the derivatives markets.

But even other traditional enterprises like General Motors or Ford face increasing problems in operating profitably in their original business segments. The total debt of Ford ($100 billion) and General Motors ($300) equals the total federal debt of Canada.

Accounting scandal at the biggest American insurance company AIG (American International Group), which is also known as "the Godfather of Gold & Silver Leasing" (AIG dominates Comex trading as the biggest clearing house):

29th March, 2005:
Greenberg resigns as Chairman of the AIG Board

A new dynamic leadership at AIG wouldn't hurt the company, but what concerns the market is that the resignation of Greenberg might be a sign that more scandals will come to the daylight. Who knows what AIG has done to maintain its vibrant profit growth?

Some people are even saying that AIG is nowadays nothing else but a vast Hedge Fund.

17th February, 2005
Greenspan warnt vor Fannie Mae & Freddie Mac

"The Fed's chairman, Alan Greenspan, has urged Congress to do something to rein in America's two monster mortgage-finance agencies, Fannie Mae and Freddie Mac, before they put the country's financial system at risk."

"Fannie Mae and Freddie Mac, the twin titans of America's mortgage markets, think of themselves as big, friendly giants. They stand behind the mortgages of around three-quarters of America's households-they "make home possible," as Freddie Mac likes to put it. Their circle of friends does not, however, extend to the Federal Reserve and its chairman, Alan Greenspan. On Thursday February 17th, he told Congress that by letting these two agencies grow unchecked, "We are placing the total financial system of the future at a substantial risk." Very big but not so friendly, these giants could soon loom over America's financial skyline like Godzilla and King Kong." (2)

"The combined portfolios of the two federally chartered companies exceed $900 billion. Greenspan added that, "if they continue to grow, continue to have the low capital they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest-rate risk aversion, they potentially create ever-growing potential systemic risks down the road." Greenspan further suggested that the companies could hold onto as many Treasury bills as they choose, but elect not to since there is no spread for them "to exploit." His suggestion is that the two be limited to portfolios of no more than $200 billion." (3)

5th April, 2005
Falcon resigns as Director of Fannie & Freddie

Falcon: "The agency has successfully dealt with serious problems at two of the largest financial institutions in the world." ... "And we did so in a manner that avoided disruption in our financial system, while allowing both companies to continue fulfilling their vital public mission."

Greenspan further mentioned during the testimony on February 17th that the real estate markets in various regions of the country would show all signs of a bubble.

References:

(1) Excerpt from the song "The Wind of Change" by The Scorpions. Read and listen to the full text of the song here:
http://www.screenpictures.com/cards/windofchange.html

(2) Article in The Economist: "Building the American dream... or nightmare?"
February 18, 2005:
http://economist.com/agenda/displayStory.cfm?story_id=3686475

(3) Article by Bill Mann: "Greenspan to Fannie: 'You're Too Fat!'"
February 18, 2005:
http://www.fool.com/News/mft/2005/mft05021807.htm

12 April, 2005
Stephan Bogner
email: team@silberinfo.de
website: www.silberinfo.de

321gold Inc