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Gold Action #430

Dr. Clive Roffey
Oct 2, 2006

A good Yom Tov and well over the fast. May you all have a happy and healthy New Year.

The markets have been interesting over the past two weeks. I have continuously maintained that the sell off in gold shares of the past month was the end of an old correction and not the start of a new bear market. Sell offs in old corrections have exactly the opposite connotations as they indicate the onset of a new BULL market phase not a new bear market.

I have focused on this analysis in this week's issue.

For the past couple of months I have been mulling over the various configurations that are evident in the gold price, offshore gold shares in $ and JSE gold shares in Rands. I have long held that any analysis of bullion must take into account the reciprocal movement of the shares. This has been a stumbling block as there appears at first sight to be a complete difference in performance of the shares in the various currencies to that of bullion. However when one takes into account the huge swings in the Rand / Dollar relationship over the past few years a much clearer picture emerges in which they have all been doing the same Elliott Wave configurations, but in different ways. The bottom line is that all the gold sectors are now back into synch with bullion and have reached the same point of analysis.

The way forward is much clearer and I present that analysis as the main feature of this week's data.

The Dow continues to inch its way towards a new high. I must express some reservations as the move to the new high area has not been totally convincing. Before I commit to a new upside target level I want to see a clear upside breakout and pullback to test the breakout with the following bounce. Only then will I be completely happy with the Dow and new long term high potentials. But if it fails and drops back under 11 000 I will be extremely bearish.

In addition we are fast approaching the nemesis month for the US markets as historically October has not been too bullish for the Dow.

In the meantime bullion has bounced as expected and is back above $600. The critical point is $625 that signals the breakout level from the current chart pattern. Once above $625 I expect to see both the recent $730 high and January 16th 1980 long term $850 high be taken out. I am extremely bullish on bullion and the gold stocks for the next 15 to 18 months. There will certainly be corrections during this time frame but the upside potential is enormous and I expect to see a resumption of the gold shares as the leading global sectors.

The Rand, as expected, has continued to weaken. I believe that we are into the final stages of this period of weakness and that any level above R8 will be close to the bottom of the Rand's weakness. I am not bearish on the Rand for the long term but the short term data has been indicating a weak currency for some time.

But the bottom line of global investment strategy must revolve around the gold market. I have produced in previous issues the relative strength data of the various gold indexes relative to bullion and shown their long term downtrends that are ready to be broken upside strongly in favour of gold shares. I believe that we are at the crossroads for gold shares and that a totally new attitude to gold shares will emerge over the next few months as they are re-evaluated to the level of investment vehicles and not just trading opportunities. This is likely to result in a surge of institutional interest in gold shares, not as merely a safety factor but as a fully acceptable and desired investment product.

Before I start the gold analysis it is essential to again review the chart of Brent Crude Oil. This chart is shown over the past four years with all the grouped oscillator buy and sell signals. There is a major oscillator buy signal at this point of time. I am looking for a low in the oil price and a resumption of the bull trend after the recent correction. I must look for the oil price to move to new all time highs and in all probability attack the $100 a barrel. This is like the gold market. It is the end of an old correction and not the start of a new bear market.

The daily price of Copper has also had two grouped oscillator buy signal. This same data is reflected right across the metals board irrespective of whether we are talking base or precious metal charts. This data signals the end of the resources correction and the resumption of the bull trend that should take all the metals to new all time highs.

Gold

I am amending my Elliott Wave analysis of gold bullion and the various gold share indexes. Since 2001 I have correctly analysed the bull market in gold bullion as a potential extended nine wave move. This has proved to be accurate. I show the analysis below that I have detailed on numerous occasions.

 

But for the past year I have been uncomfortable with this analysis as it did not fit with the performance of the various gold indexes. I have long held the opinion that one cannot produce an accurate Elliott Wave analysis of bullion without strong reference to the related performance of the shares. In this context I began to question the validity of the nine wave move and recently adjusted this to the analysis below.

I altered the current correction to be the 3-4 wave. There is very little difference in this analysis to that of the nine wave format except that it indicates a higher ultimate price for bullion than the nine wave format.

But I have recently been doing a lot of comparative analysis between the gold price and the various gold indexes and have decided to amend my Elliott wave analysis to fit with the shares. This gives a far greater upside potential than before.

Gold and FT Gold index

The top chart is bullion and the bottom is the FT Gold index over the same time period. I prefer this index as it is a true global gold index reflecting the movement of American, African and Australian gold shares. Although there were some minor differences in the first major bull leg to late 2003, both wave 5's ended at the same time in early 2004 signifying the finish of the first major bull leg of the five wave Elliott requirement. In both cases the A-B-C elements of the 1-2 correction were together. But whilst bullion formed a diamond pattern the FT Gold index mapped out a classic Elliott Flat correction in which the C wave failed to move under the A wave. This was a very weak correction and heralded a strong forward move. This occurred in both cases.

The question now is 'what is the current correction'? Is it the big 3-4 or is it merely a minor 1-2 in a new five wave upward thrust ultimately leading to the top of wave 3 that will take both bullion and the share indexes to much higher levels than previously anticipated?

I believe that the current correction is a more likely to be a minor 1-2 before a move to well above the previous $720 peak, probably above $800, when the minor 3-4 correction should occur leading to a wave 5 that will eventually peak well above $1000 before we hit the next major 3-4 correction. Thus I am not expecting the top of wave 3 to occur until above $1000.

After the move above $1000 the next major 3-4 correction will probably pull back to test the $800 level. BUT we still have the super wave 5 to come in the long term bull trend that will exceed the +$1000 peak of wave 3.

Gold and JSE Gold Index

The bullion chart is again on top and the JSE Gold index at the bottom.

There appears at first sight to be two completely different chart pictures. It was the huge weakening of the Rand from R6 to R13 to the $ that led to the massive pre-emptive bull surge in the JSE Gold index in 2001 and 2002. This was followed by an equally dramatic strengthening of the Rand from R13 back down to R5.65 to the $ that was also the cause of the protracted C wave sell off in the South African gold shares as measured by the JSE Gold index, despite the rise in the $ gold price from 2003 to 2005. The Rand was much stronger than the gold/$ price and this led to a falling JSE Gold index. The difference in the performance of the gold bullion price and the JSE Gold index was solely due to the gargantuan swing in the Rand against the $ from R6 up to R13 and back to R5.65 over the 2001 to 2005 period.

BUT all three charts of bullion and the FT and JSE Gold indexes hit their bottom of wave 2 in mid 2005. This is the key to this analysis.

In my analysis the bullion, the FT Gold and JSE Gold index charts are back in synch and all indicate that the current correction is a minor 1-2 with the 3-4 and final leg 5 still to come before we hit the top of wave 3 run and move into the potentially large 3-4 correction.

The JSE Gold index is projected on the basis of my revised Elliott Wave analysis. I must look for an ultimate rise to around the 8000 level from the current 3000 area before the final end of the large wave 3. I must look for around a 250% return on capital on gold shares over the next 15 to 18 months.

Harmony has a huge reverse head and shoulders pattern that indicates a normal arithmetic count up to R220 out of the current trading pattern. But in my analysis this will only make the 3-4 corrective area and still signal a further serious upside potential to come for wave 5. I must look for a price of well above R300 for Harmony before the conclusion of the big wave 3.

Conclusions

The long term implications of this revised Elliott Wave analysis are enormous.

  • It first implies that the gold shares have not even really started their true bull market run.
    a
  • The correction from the start of this year is over and we can expect a very strong gold bull market going into 2007 and for most of that year.
    a
  • It also implies that as wave 3 is usually the longest and strongest that gold shares are likely to have a very powerful upside charge for the next few months before the onset of the 3-4 minor correction.
    a
  • It also implies that once the 3-4 correction has ended the final kick into wave 5 will also be a typically euphoric buying spree that will accelerate gold stock prices dramatically before the onset of the serious 3-4 correction.
    a
  • The time frame for the move to the top of wave 3 could well be towards the end of next year so 2007 looks likely to be a real golden year.
    a
  • Once the 3-4 correction is over it indicates that there is still a huge wave 5 still to come in the future.
    a
  • The serious 3-4 correction could well last at least 9months or even up to 18 months before the turn into the final wave 5.
    a
  • I am looking for at least another 4 to 5 years of a major bull trend in the gold market before we hit the ultimate bull market top of wave 5 and the final end of this long term gold bull market.
    a
  • There will be serious corrections along the way but I would place a 4 ­ 5 year time frame on this market to the top of wave 5 for long term investors.
    a
  • At this stage I am not inclined to postulate on any final level for the gold price at the end of wave 5 but I certainly expect to see the previous $850 January 1980 high exceeded and an attack on the $1000 level as a certainty.
    a
  • I would expect to see the final top of wave 5 well above $1000.
    a
  • This analysis also indicates that the shares are likely to start outperforming bullion and to break upside out of their long term negative relative trend.
    a
  • This will promote a totally new attitude to gold shares as a long term investment and not just as a minor safety factor or trading vehicle.
    a
  • Institutional attitudes will change and gold shares will become integral elements of serious portfolios.

Oct 1, 2006
Dr. Clive Roffey
Johannesburg
South Africa
email:
info@utm.co.za
Roffey archives


"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.

'Gold & Silver Penny Stocks' is the sister publication to 'Gold Action' and is produced by Dr. Clive Roffey; croffey@mweb.co.za

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