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Crunch TimeTroy Schwensen The following is an extract from the March '07 Issue of The Global Speculator sent to subscribers on the 5th of April 2007. GOLD MARKET UPDATE The month of March '07 has seen some wild swings in the precious metals markets. The weak hands have continued to unload shares to the strong hands and the strength of this precious metals bull market has improved as a result. Whilst it is a little early to claim that a bottom has been put in place, things are certainly starting to look that way. With the US housing market showing signs of distress and the US dollar falling out of favor amongst foreign investors, the Federal Reserve has been left with little ammunition to combat either problem. To lower rates now leaves the US dollar vulnerable to further falls, as foreign investors start looking elsewhere. To raise rates in order to sure up the necessary foreign investment (Twin Deficit funding) will only serve to accelerate weakness in the housing market and the US economy in general. Something will have to give and my bet is on the US dollar. The Gold price is already showing signs of strength and will obviously be a major beneficiary of this devaluation process.  XAU  XAU/GOLD RATIO  Last month we were looking at a scenario where the XAU was underperforming the Gold price and was in the midst of another significant pull back. Technically things were looking weak as the XAU/Gold ratio moved towards the 0.20 level and sentiment had again turned very bearish. By the 13th of March the XAU/Gold ratio broke 0.20 and the XAU found an interim bottom at 128.55, with the Gold price at US$650.08. Since then we have seen a significant bounce of over 11% in the XAU and the Gold price has put on just over 3% to US$671.90 an ounce. Last month we also talked about how Gold shares should typically perform in comparison to the metal when conditions are technically strong. That is the shares should outperform the metal by at least 3 to 1. A look at the performance of the XAU since the 13th of March sees the index outperforming the Gold price by just over 3 to 1 and things are starting to look as solid as they were weak just 4 short weeks ago. At this point I am tentatively looking at the low made on the 13th of March as a key turning point. I would however like to see the XAU go on with things and break through the significant resistance that exists in the 145 -150 range. A look at the XAU/Gold ratio section of the chart above shows a downward sloping trend line with resistance at about 0.218. If the precious metals shares can continue to outperform the Gold price and the ratio can break this trend line, this would also be a solid confirmation that a bottom has more than likely been achieved. OUTLOOK The two short term scenarios as I see it over the coming weeks: Scenario 1: The precious metals shares continue
to outperform the Gold price and work towards breaking strong
resistance in the 145-150 range. The Gold price will eventually
break stiff resistance in the US$665-$US670 range, before continuing
to work towards an interim target of US$740 an ounce. I support
this scenario. Intermediate Term Outlook: Over the intermediate term my next target for the XAU is 175 -180 (Close to the previous high) consistent with the measurement of the present Reverse Head and Shoulder pattern (Assuming the neckline at 145 is broken). This could then be followed by a more extensive rally that takes us to 230 over the latter half of 2007 or early 2008, depending on how long it takes this consolidation to run its course. NORTH AMERICAN SILVER INDEX (NASI)  The Silver index corrected during the month to the support of its consolidation triangle and like the XAU has since rebounded to take out resistance at about the 7,500 mark. In contrast to the breakout that happened in February where the Silver shares underperformed the Silver price, this breakout has occurred with the silver shares outperforming the Silver price and is therefore much more bullish in its implications. OUTLOOK The two short term scenarios as I see it over the coming weeks: Scenario 1: The resistance at 7,500 will continue to be tested with an eventual clean breakout coinciding with the relative strength comparative with the Silver price breaking the long term downward sloping trend line (Already in the process of happening). Once this occurs, the Silver index should embark on a new bullish leg upwards. I support this scenario. Scenario 2: If the Gold and Silver price were to get caught up in the sharp fall of the other commodity prices and/or a prolonged sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 4,300. Whilst the risks should be considered, I don't support this scenario at the present time. Long Term Outlook: Over the longer term my next target for the NASI is around the 11,000 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends. CLOSING COMMENTS Well we have had the ugly correction, we have endured the usual pessimism that surrounds these conditions and we are presently coming out the other side. The challenge now is for the precious metals sector to achieve breakouts in the various markets we have discussed. Silver continues to look the strongest with a breakout in that market presently underway. The key indicator will continue to be the relative strength comparatives with the respective metals. If these indicators continue to strengthen, the probability of a sustainable rally will improve. At this stage I would say things are looking reasonably favorable. For anyone interested I write a free monthly precious metals newsletter which you can sign up for on the website below. Troy Schwensen CPA Troy Schwensen
is a full time investor/Trader who spent 8 years in the Accounting
and Finance industry which included roles with blue chip Australian
companies such as Goodman Fielder and Fosters where he spent three
years as a Senior Business Analyst. He made a decision to leave
this industry in 2002 after discovering a long term opportunity
to invest and trade in the precious metals market where he has
since used his analytical skills to build a sound working knowledge
of the sector and its comprising companies. 321gold Ltd |
