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The gold price is breaking upside

Dr. Clive Roffey
1 Nov, 2005

The most important news of the past two weeks was not the appointment of a new Fed Chairman, nor the minor rally in the Dow but the impact of the Anglo American restructuring in South Africa and its impact on local investment.

Anglos has decided to sell off its interests in Mondi Paper and reduce its exposure to Highveld Steel and Anglogold. All of this is ostensibly in the interest of consolidation of its global resource interests. But there is an undercurrent of other potential factors. Remember that Anglos has moved its main listing from the JSE to London where it is a member of the FTSE index. In addition they de-listed De Beers from the JSE and also closed some diamond mining operations in South Africa.

This new set of proposals will benefit share holders but also indicates a further removal of Anglo's exposure to SA. When one considers the cumulative effect on business of the draconian Labour Laws, the heavy handed BEE and Mining Charter coupled with the upper level tax burden it is no wonder that South Africa is not considered to be in the top echelons of internationally investment friendliness. It would not surprise me to find that these factors also contributed to Anglo's actions.

Frankly this is another warning shot to Government to start thinking in business terms and not to solely focus on its political agenda.

Trevor Manuel's tax breaks for investment in the rest of Africa may seem interesting but my reaction is that any tax breaks would be better served by attempting to keep local mining groups in SA and attracting foreign investment in industry rather than the bond market.

Fortunately the next five years look bright for resource prices and the companies involved in their mining and beneficiation. This will give SA a breathing space in which profits and taxes will increase in this resource orientated economy. But then what?

Back to the markets.

The gold price is breaking upside and looking ready to attack the $500 level. But the major aspect of the gold market is the potential acceleration of gold share prices. They have all finished a minor correction over the past few weeks and are ready for some serious upside strength. Most of the share charts are indicating another 50% charge by the end of the year. This is not a stalling market but an accelerating one.

The main feature of the gold market revolves around the Rand. For the past few months I have constantly detailed that whilst the Rand last year was one of the world's strongest currencies that I was looking for a dramatic change in this to become one of the weakest currencies. Over the past few weeks the Rand has started to weaken against the leading global units and the chart data indicates a serious sell off in value for the next six to nine months.

A fall in the Rand to under R7 to the $ would precipitate a catapult in the share prices, especially if this were to be coupled with a running gold price. The rand price of gold remains the key to South African gold share performance.

Platinum and silver will also run as will their shares. But the major aspect of all serious global investment portfolios is that equities are to be replaced by resource and especially precious metal stocks.

The Rand / Dollar chart has a potential head and shoulders top pattern plus a critical trend line. The R6.65 level is extremely important. A move by the Rand to break under that level to R6.70 will indicate a serious weakening of the currency for the next few months. If the neckline of the head and shoulders pattern is broken it will trigger a weakening currency to R8.20.
Against the Euro the Rand is also at a cross roads. There is resistance at R7.70 and support at R8.10. A move under R8.10 will signal a serious downside break for the Rand to weaken further against the Euro.

Against Sterling the Rand also has a large potential top pattern. Once again there is a critical support trend line at R12.30. To data the currency is managing to hold above this support. But any further weakness will trigger a serious downside potential for the currency.

Against all the leading currencies the Rand is showing significant signs of potential weakness. A move under the support levels will result in a serious sell off in the currency. This would be extremely bullish for gold shares.

I cannot over emphasize the importance of the Dow at this point of time. I have already, in recent discussions detailed that the Dow had its last stand. But the situation is now DIRE. The last minor support at 10200 is being severely tested. Once the index breaks under this it will be the final confirmation of a LONG TERM bear market. The downside count out of this format is to 8800 and it would not surprise me to see this target reached by the end of this year!! This is a very nasty chart with HUGE BEAR implications.
Last issue I detailed that although the Dow looks bad the broader S&P 500 looks worse. Over the same time frame it has mapped out a large rising wedge pattern. A fall under the short term support at 1170 will trigger a serious fall out back to the target count of 970. These two leading US general equity indexes are in dire trouble. That also signals impending problems for global general equities.

The NASDAQ is no better. It also has a serious rising wedge pattern similar to that on the S&P.

ALL global general equities are to be avoided.

This major negativity will impinge directly on the JSE general equities.

But more importantly it will trigger a move of some serious fund money out of equities and some of it into gold as a portfolio hedge.

This is the most important chart in the gold market. The Rand price of gold is starting to accelerate. It has broken above its resistance levels on both the price data and RSI. There are no signs of any sell divergence and once the RSI moves above 70 the price will really charge. This data is hugely bullish for SA gold stocks.
I recently detailed that the Oil price was heading for a correction having hit my long term upside target of $72. There is a head and shoulders top pattern with a downside target of $56 that coincides with the major support level. I expect further minor weakness in the oil price in the short term.
Many analysts are focusing on the short term potential for the gold price to be mapping out a head and shoulders top pattern that indicates a downside to $450 if the neckline support breaks at $463. This is a wait and see situation as a move above $475 will negate this head and shoulders possibility.
I have on numerous occasions detailed that the price of Palladium was ready for a serious upside bull run and likely to out perform the price of platinum. This is happening and this minor precious metal is likely to be a major bull market contender.
Whilst gold has been mapping out a possible head and shoulders top the Platinum price has been inside a wedge pattern. Note the triangular format of the RSI. This is another wait and see situation as the breakout from this pattern will be dynamic and lead to a very sharp move, one way or the other. Wait for the breakout.

When in doubt, check Silver out!! This is a very bullish chart having broken upside out of the triangular pattern and above $7.50. In addition the RSI has broken upside and indicates a long term new bull trend. Thus if silver looks OK then I expect the gold and platinum prices also to remain inside their bull trends.

The next week is critical for the precious metals. Any upside breakout will lead to a serious bull market charge in precious metal prices.

I have continuously detailed the huge potential upside for Angloplats? Apart from its exposure to Palladium it is also one of the flagship investments in the restructured Anglo American situation. There is substantial further upside for this leading platinum producer. I am certain that Anglos has one eye on the booming Chinese motor industry and catalyst requirements.
The mother company, Anglo American Plc, is quoted in London and on the JSE as well as the other OTC (AAUKF). This massive global mining group is into a serious new bull trend having just broken out of its large triangular pattern. If you want exposure to a broad based gold, platinum, coal, iron ore and base metals producer this is the best that there is at this point of time.
Even DROOY looks good. There is a reverse head and shoulders pattern that is currently forming the right shoulder. A break above the neckline resistance at $1.50 indicates an upside to $2.40 as the target.

Dr. Clive Roffey
South Africa
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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.

'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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