Gold Action #415

Dr. Clive Roffey
February 27, 2006

The gold market has been drifting for the past few weeks as it consolidates its recent gains. After a brief flirt with the $535 support the gold price has rebounded back above the recent $555 resistance. Its Friday night push in the US above this $555 resistance has triggered the start of another bull trend and signals the end of the recent correction. This gold market has been in limbo for the past couple of weeks but the news of attacks on oil installations has provided a new set of fundamental data to determine the next main trend move. Irrespective of the short term vacillations my longer term target of $620 remains intact.

A few weeks ago all the websites and news media were full of huge upside forecasts for the gold price as it traded above $570. Suddenly all has gone quiet. Where are all these fine weather analysts who swiftly disappear when the going gets tough? I am always suspicious of markets when all and sundry unexpectedly become bullish. Meanwhile the gold shares on the JSE reacted back as anticipated. This is a healthy correction in an ongoing long term bull market. It is not a particularly stable area for single stock futures traders but for long term investors the picture remains stable with further upside potential. But all this pales into insignificance when compared to the Dow.

It has apparently moved over the past few weeks into new high ground above the 11000 level. This has triggered a bout of bullish commentaries. But I remain very sceptical as the chart pattern is that of a megaphone with rising tops and falling lows. This is an indeterminate pattern that can react either way out of its formation. The bottom line is that a move above 11500 will be extremely bullish whilst a fall under 10500 will have negative connotations. I remain unconvinced of any long term bullish potential for the US markets. Only a move by the Dow to above 11500 will cause me to change my analysis. Meanwhile I remain in neutral with a slight negative bias.

The key chart for the JSE at this point of time is the Rand / Dollar. It has been range bound for the past two months between R6 on the strength side to R6.2o on the weakness levels. As far as I am concerned the Rand has formed a double bottom against the Dollar at the R6.00 support and is ready to bounce off this area into weakness for the next phase. The upside count out of this pattern has extended my upside from R6.35 to R6.45.

Our sister publication 'Gold & Silver Penny Stocks' amply illustrates the short term corrective nature of the market. Many penny stocks had substantial base formats that had been accumulated over the past year. They rocketed over 100% during the past three months and have since pulled back. They are now into serious buying areas once again. If the penny stocks are OK then so are the majors.

The main news of the week on the JSE revolved around Anglo American's spectacular results and its stated intention to sell off Anglogold to the market. Coupled with its potential moves out of Mondi, Highveld and Tongaat, this news further reinforces the opinion that Anglos are steadily distancing themselves from South Africa. It may well be the public relations spin that they wish to focus on global minerals but the between the lines implications are pretty clear. Goodbye SA.

Watch this gold price carefully for a move above $555 or under $547 as this will determine the next short term market swing for both traders and investors. Meanwhile the oil price looks to have completed its correction that I anticipated after it hit my $72 target. If this is the case then I expect new highs on the oil price going forward.

This week I also look at several uranium stocks that, despite all the analytical hype, have done nothing for the past year as well as the silver stocks that are looking for further action. I also look at the bullish prospects for DROOY in this week's Gold & Silver Penny Stocks newsletter.

The 11500 resistance is shown on the long term picture of the Dow. It has been unable to penetrate above this level for the past 8 years (a Fibonacci number). This is the key to the US market.

The daily data on the Dow is showing the wedge type of formation that has been in progress for the past two years. But it is the broadening or megaphone pattern in red that is the key to the short term situation. For the Dow to remain with a long term bullish potential it must break above of both the red and black top trend lines. A failure to produce such a break will show that there remains an inherent weakness in this index and US markets. The support that has developed at 10700 is critical in this respect. The Dow must be able to stay above this 10700 support. We are only playing with a range of 500 points that is relatively small in comparison to the resultant moves once the breakout is confirmed, to either direction!

I am making a big chart out of the FT Gold index. This is the most representative index of global gold stocks as it covers North American, South African and Aussie markets. The main downtrend since 1990 has been broken. In addition both the RSI in the bottom frame and MACD in the top frame are confirming the new highs on the index. The recent correction is a short term reaction to an overheated market, nothing more. There is still a lot further long term upside in this data. Only when I start to see divergences on the oscillators will I start to worry. Until then relax and stay invested.

I must display the Rand as a large chart in view of its importance. This is the Euro / Rand. There is a huge falling wedge pattern indicating a sharp trend reversal into a bullish mode for the Euro and weakness for the Rand. In addition there are buy divergences on both the MACD in the top frame and RSI in the bottom frame as they have refused to confirm the new lows on the chart. This indicates that the Rand is ready for a period of sharp weakness. Such a move would be extremely bullish for gold shares and the Rand price of gold.

	The Rand against Sterling also has a major trend reversal situation in which there are also buy divergences for Sterling. I must look for a major period of weakness for the Rand after its double bottom formation.
	The Rand price of gold chart remains locked inside its long term upside trend. There was a diamond pattern that I detailed and all that has happened over the past few weeks is that the price has pulled back to test the breakout point from this diamond. This is usually a strong buying area. I do not expect to see a move back under R3300 a kilo.
	I have updated my Elliott counts for bullion. I was expecting a run through to $620 before we hit the major 7-8 correction. We have been in a nine wave extended move since mid 2005 and that will only complete at $620. At that point I expect the major 7-8 correction to kick in and a reaction back to at least $570. But that will not be the end of this bull run as we still have major wave 9 to come for an upside target around $685 towards the end of the year.
	I have amplified the nine wave move in which bullion is trading at present. The reaction back to $535 was the bottom of wave 8 and the recent jump to $555 and pullback to $547 the first minor correction in the final wave 9 that should take the current trend up to at least $620 before the corrective wave 7 sets in for a pullback to $575. I would expect to see bullion up at $620 sometime around the end of March.
	I return to my long stated contention that JSE Gold index, and all the gold shares MUST go above the top of wave I in 2002 before this wave III can even be said to have started. At this point of time Goldfields in the US has made it through as has Anglogold on the JSE. With these two stocks already showing the way the others will follow suit. So even though the current correction is sharp it is still a major buying area for gold stocks for investors.
	If we expand the JSE Gold index's move from the start of wave II last May there is confirmation of the nine wave format in the shares as well as bullion. There was an unusual running correction as the 5-6 leg. This is an up sloping wedge that leads to a strong upside charge once completed. The 7-8 correction is completed and we should be looking at an attack on the previous 3700 2002 peak by the end of March.

February 25, 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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