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-- Posted Friday, 14 March 2003 | Digg This Article

As the time runs out for Saddam Hussein the explosion of rhetoric on the Middle East, US policy and European objections to war continues to catapult. Most commentators have decided that the desire for regime change and the valuable oilfields are the main reasons for the US insistence that Iraq must be invaded. I do not agree.

The traumatic events of September 11th have dramatically twisted the US psyche. This violation of their previous sanctity, way of life and personal security has left a deep and indelible scar and is, to me, the driving force behind their reactions. The twin towers were not just tall buildings; they represented the gateway to capitalism. They were the proud icons in the world’s most vibrant city of American leadership and a brashly confident erection to Wall St., the global expression of free market commerce. The destruction of the twin towers was not just the collapse of an edifice and resultant loss of innocent lives; it was symbolically the shattering of the American dream and all it represented into a nightmare.

America prior to the demolition of the World Trade Centre revelled in its role as the unofficial world policemen. Since the event they have assumed this mantle for real. Retribution is the name of the game. Someone has to pay. As Bush stated immediately after the event in his no holds barred blunt Texan manner ‘you are either for us or against us". France, Germany, Russia and the UN would do well to reflect on that challenge.

Since the Romans invaded Europe that continent’s psyche has become accustomed to the continuous acceptance of war syndrome. Their reaction is more conciliatory and less antagonistic. America was on the sidelines for the great war of 1914 and eventually sucked into WWII as a result of Pearl Harbour. But the modern mainland North American land mass had never before been violated. I believe that the US psyche feels that not only has it been horrifically and violently raped in its own house, but also stabbed in the back. It is fighting for its life. Opponents of the US would do well to remember that predatory animals are at their most dangerous when wounded.

Some analysts point to the fact that the cost of any invasion of Iraq will be twice the GDP of that country and that this is a total waste of money. I believe this is missing the point by a mile. The US wants retribution, irrespective of the capital cost, and requires that an example be made of a despot associated with those who carried out the September 11th attack as an unequivocal warning to others of a similar ilk. Saddam Hussein was the obvious choice in view of his invasion of Kuwait and continued flouting of twelve years of UN resolutions requiring disarmament.

So what are the effects on global market’s likely to be? I expect the invasion to proceed, even if Saddam vacates his position, and undoubtedly cost a huge sum of money irrespective of the length of the action. In addition there are all the promises of aid that have been negotiated to buy UN favours. On top of this will be cost of rebuilding Iraq. The US has already clearly stated that only their national companies will be allowed to tender for this reconstruction work.

When one couples the hugely inflationary cost of any conflict with the flat to negative growth prospects in the US economy it invokes stagflation where earnings and salaries remain flat to negative, that is if you still have a job, whilst costs rise substantially. This will be absolutely devastating for both equity and bond markets but great for gold. Dollar equity and bond assets will be ditched as the former global currency leader is shunned as an investment vehicle. My data is already indicating a fall in the US $ to parity against the Swiss Franc and believe it or not, Yen100 to the dollar. This will be the accelerating factor leading to many of the huge upside counts on the gold price expressed by leading technical analysts.

Meanwhile a shock dread hit the gold share market at the start of the week as traders and investors panic sold into the bottom of the correction. During the market’s peak last May euphoria dominated gold market sentiment. It was going up forever. Last week panic reigned. The gold market is famous for over reactions.

Current levels are a superb buying opportunity for investors looking to the next twelve months as the bull markets in gold bullion and the shares remain well and truly intact. One of the major tenets of Elliott’s five wave analysis is that the next bull market must, after the corrective phase, always significantly supersede the peak of the previous bull run. This implies that gold share prices will rise to levels well above the previous May peak. In real terms I look for at least a doubling if not trebling of current gold share prices during the next 18 months.

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Gold Action is a fortnightly commentary on global gold and precious metal markets produced by Dr. Clive Roffey who has been a leading independent commentator on gold markets since 1969.Contact email : chartist@mweb.co.za

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This is the classic Elliott five wave formation. The significant elements are the three upward thrusts interspersed with two corrective phases. But the most relevant aspect of Elliott to today’s gold market is that wave 3 MUST move a lot higher than the peak of wave 1 and similarly wave 5 MUST be significantly higher than the peak of wave 3.

In other words it does not matter if you bought at the top of wave 1 you will still make a lot of money by riding out the correction in 2 and waiting for the peaks at wave 3 or 5.

In my analysis we have just had wave 2 of this long term five wave upside move in gold and gold shares. Thus even if you bought durin g the euphoria at the top of wave 1 last May and are crying about the paper losses, the next upside thrust will take all the prices to well above the previous May peak. I look for an 18 month bull phase as the next leg of the gold market.

The above chart of Durban Deep (DROOY) has my Elliott Wave notations attached. After the November 2000 bottom the stock moved up in the classic five wave thrust. Since May of last year it has corrected in the A,B,C move. BUT the C wave has not yet fallen under the A wave.

In most cases this is an automatic move. However when C stays above A it signals a very weak correction and a powerful forward thrust. I believe this to be the scenario for the whole gold stock market. In addition the C wave should wipe out the fifth wave of the prior upward move and fall back to the level of the 3-4. This is exactly what has happened to DROOY. I rate this stock along with GFI as two of the major buys at this point of time.

Many analysts are looking for further downside. But take a look at the FT Gold index that is a cross section of North American, African and Australian gold stocks, in fact a global index of gold stocks. Go to the sharelynx site for this. You will note the perfect triangular pattern mapped out by this index.

Thus I do not expect to see further downside in the gold and silver market. In addition on Thursday the gold price was slashed $11 at the NY opening yet the gold shares went UP. They ignored the bullion price.

Once again I state ….. watch the shares and forget about bullion.

To put this analysis in a nutshell. I believe that the gold share market has run the full course of the corrective phase since May. I am looking for the next major upward thrust in gold stocks and bullion. This will take share prices to well above their previous May highs.

Stay with those gold shares. In fact take a two year sabbatical from watching your gold portfolio!

-- Posted Friday, 14 March 2003 | Digg This Article

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Gold Action is a fortnightly commentary on global gold markets produced by Dr. Clive Roffey who has been a leading independent commentator on gold markets since 1969.
Dr. Clive Roffey, Gold Action

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