Gold Action #423

Dr. Clive Roffey
Jun 12, 2006

Interest rates around the world have been hiked. This is the being heralded by the bankers as the new panacea to cure all inflation worries. Forget about it. Although the metal prices are having a breather they are still in major long term bull trends and will continue to cause inflationary scenarios. The interest rate hikes have merely put the cap on all the leading global equity markets. How long have I been detailing the huge sell divergences that have existed for at least the past year on all major global indexes?

Global equity indexes have been topping out for a long time and displaying all the characteristics of a serious trend reversal into a bear market. The Dow has had the most dominant display of negativity with its seven year potential double top pattern. The downside crash of the past couple of weeks has been on the cards for some time, so I am not fazed by the sudden collapse. As far as I am concerned 100 point moves will now become the downside norm for the Dow. The volatility of the past has ended as the new bear trend emerges. This is a market that has stopped the three steps forward and two steps backward jive. It has moved into a protracted long term bear TREND. Trends have direction and momentum. We have entered a new trend in both direction and momentum. Get used to serious downside falls with sharp rallies. This as far as I am concerned is the new direction and pattern.

Metals on the other hand are merely taking a breather inside an ongoing long term bull trend. Whereas all the global general equity markets have for the past year been exhibiting serious sell divergences there are no similar divergences on the metal charts. The oscillators on these charts have reflected the new highs and this indicates the metals are in stable long term bull trends. In the short term the metal prices were overbought as I have previously indicated. But this is a relatively minor correction in an ongoing resources bull trend. This is not, in my analysis, a major metal price topping out.

I must continue to rate the current price levels as serious buying areas for both metal traders and investors in their shares. The gold price in particular has mapped out a falling wedge that will lead to a huge upside catapult once the current shakeout has ended.

I previously analyzed the Rand to weaken back up to the R6,85 level. It has hit my target and I expect to see some consolidation at current levels with even a pullback to test the R6.65 area. But I expect further long term weakness in the currency and any strengthening back to R6.60 should be used as a selling area for the Rand.

All the data indicates that the correction in the gold price is very nearly finished. The overall picture is one of a forced situation that is likely to reverse rapidly into a fierce upside catapult once it is realized that global markets are into declining mode and that there is no money to be made by remaining invested in their shares or unit trusts.

China's growth is unlikely to slow for the next three years and the overall demand for metals is likely to continue unabated. Internal growth in China is the key to metal prices. There is a misconception that China must export the bulk of its production. By 2010 China will be virtually able to consume its total production as its population billions convert to middle class status at a growth rate in excess of 25% per year. This explosion in the Chinese and Indian middle class buying power will far exceed that of the US and Europe.

Do not panic out of the resources shares. Sure you can panic out of general equities as they have turned into bear markets. But the resources are having a mild correction before exploding to new highs. I remain very bullish on all resource stocks.

Have you noticed the absence of all the sudden gold experts during the current correction that were calling for telephone numbers in their projections??? They are conspicuous by their silence.

This is a metal price index of Cu, Au, Pb, Fe, Zn, for the past hundred years adjusted for inflation. There are several major aspects to note from this data.

• There has been a consistent downtrend in the inflation adjusted value of metal prices for the past 100 years.
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• There is a median line in black drawn through this data.
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• Every time the index moves above or below the median it always comes back to test the median and in most cases overshoots.
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• The sudden rise in 1980 was the oil price inflation spike as metals followed suit.
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• The current level is well below that of the 1930's depression. Thus metal prices relative to inflation are historically dramatically under valued.
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• For the past three years the index has started to reverse back to the median and is likely to exceed this level in the current bull trend.
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• BUT the key to this data is that China and India were not great consumers during the past 100 years.
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• These billions of consumers have kicked in and there is a strong probability that the current upside move in the index in red is not just a reversal back to the median.
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• There is strong evidence to support the start of a major new bull market that signals the end of 100 years of a relative bear market in metal prices.
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• The message is clear. This is potentially a major trend reversal in metal prices that will be with us for a very long time. Get used to higher metal prices both on an every day and inflation adjusted basis.

I am reproducing a large picture of the daily $ gold price for several reasons. First it has mapped out a classic falling wedge pattern. This indicates an almost vertical catapult once the current correction has ended. Second it is necessary to note that there are no sell divergences on this data. Both the MACD in the top frame and RSI in the bottom frame have mirrored the new highs of the metal price. This indicates a stable bull market. I continue to look at this as a minor correction in a long term bull run.

I again detail my Elliott wave analysis of gold. The falling wedge pattern in the top chart is the 7-8 correction in this chart. There is still red wave 9 to come that must take the gold price well above its previous high. I would look for an upside well in excess of $800 before the end of this long term bull run. This will be the area of the market that will exude euphoria and every man and his dog will become an expert on gold as it becomes the easiest game in town in which to make money. At the present time of doom that does not seem possible. But just wait and see!!

	The Dollar / Rand chart has hit up against the major resistance level at R6.85. I had analysed previously that I was looking for a weaker currency to revert back to this level. Where to now? To me the key to this data is the length of the divergence. A two year divergence does not fizzle out into a small reversal. It usually subtends a much larger upside potential. Thus I must look for a period of minor consolidation in the Rand before breaking through the R6.85 level and on to at least R7.50.
	Copper is shown with its momentum indicator. The momentum is a particularly sensitive oscillator to divergences. I have detailed all the sell and buy divergences previously shown to indicate the nature of the data. The current price high shows no signs of any sell divergence. This indicates it is in a strong and stable bull trend. It also indicates that new highs will be made once this current minor correction has run its course. Copper, and all the metals, remain in strong bull markets that should move to new highs.
	The Rand price of Gold has also accelerated away to new highs. The momentum oscillator has also mirrored the new highs, as have all the other commonly used oscillators. This is symptomatic of a strong and stable bull trend. The minor drift over the past couple of weeks is just that... a minor correction prior to moving into a new bull market peak.
	The Gold price has yet another bullish piece of data. Take a look at the relative positions of L1 and L2 on the oscillators. In both the MACD in the top frame and the RSI in the bottom frame L2 is at least back down to the low of L1. Not so with the metal price where L2 is nowhere near to the level of L1. This is a classic example of a reverse divergence situation. This is a hugely BULLISH formation and indicates a strong upside move.
	Whilst the metals have been taking a breather the grains have started to play catch up. The grain sector of the commodities picture has under performed to such an extent that has been ignored. However this is an area of the commodities spectrum that is ready for some serious long term upside action. For commodity traders go and take a good look at the charts of corn, soya and coffee. They are all exuding long term bullish potential. This is the chart of CBOT Corn and any minor drift should be used as a buying area.
	Finally the Dow chart has the sell divergences to which I have alluded on numerous occasions. But the key to this data is the support level at 10 700. This is a massive chart support. A move under this will really send the bear market trend into top gear. The S&P and NASDAQ have similar data.

Jun 10, 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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