-- Posted Sunday, 17 April 2005 | Digg This Article
The 0.5% interest rate cut by the South African Reserve Bank caught every economist on the wrong side of the track. To a man (or woman) they all forecast no rate cut. The Rand immediately collapsed from R6.10 to R6.30 against the dollar. I believe it is immaterial whether this rate cut was introduced for economic reasons in view of falling manufacturing output or large current account deficit, as an aid to exporters or for political reasons related to union pressure.
What really matters is the effect on the South African market and economy. First reactions are that as mortgage rates have also dropped by 0.5% the housing boom will continue unabated. In addition consumer spending and borrowing are expected to increase. But the main effect as far as I am concerned is on the currency. This rate cut, with the distinct probability of more to follow in the coming months, will dramatically reduce the interest rate differential between offshore borrowing rates and local bond rates making it far less attractive to deposit money in the South African financial markets. This is likely to be further influenced by rising offshore borrowing rates. The bottom line is that a capital outflow of all the funk money that poured into the country during the period of the strong Rand is likely as it repatriates to the offshore havens. As a strong currency play and interest rate differential market, South Africa is finished.
This can only be good for the economy as investment in capital goods and industry is what is required, not funk money that will desert at the drop on an interest rate.
The bounce in the Rand from R6.10 to touch R6.32 is a perfect signal to buy resource stocks as their export revenues will rise. The real analysis of the JSE now lies with an analysis of the Rand. Some schools of thought expect a gentle slide back to R6.70 at which point they anticipate a return to strength. Most economic observers are indicating a Rand back to at least R8 to the dollar. There are even some analysts believing that the Rand has seen its ultimate lows and will now revert back to test the previous weak lows of R14 to the $. I have consistently looked for a weaker Rand to move back to around R6.70 in the short term. After that I have to review the position but the data tends to indicate that further weakness is likely.
I have often detailed, especially on the daily data, the group effect in which stocks in similar industries all move together in the bull market but then produce different patterns in the corrective phases. This has been apparent on the data of many resource stocks in which symmetrical, flat bottom and flat top triangular patterns have been occurring with falling wedges and flag formations. I have consistently detailed that when one of these stocks breaks out that the rest will follow, including golds. The rate cut shot Angloplats above its critical R245 resistance. This is the breakout signal that this stock has ended the three year corrective phase. It is also a signal that all the other resource stocks will soon follow into new bull trends.
My idiot’s award of the week must go to the seller of Durban Deep in the US on Thursday who knocked the price from 86c down to 30c when bullion fell from $628 down to $622. When will these morons realize that the fate of Durban Deep is not a function of the dollar gold price but related to that of the Rand gold price from which the majority of its earnings are generated? As often detailed I am forecasting a Rand price of gold up to R3200 an ounce within the next six months that is well above the break even of R2920 for the Durban Deep group and at least break even for its Northwestern mines.
“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.
I continue to detail the chart of the Rand price of gold as it is the most important chart in the gold market at this point of time. I have continuously detailed the importance of the R2580 resistance. The break above this critical R2580 resistance occurred in February. The current churning around the R2650 to R2700 mark is forming the right shoulder of a reverse head and shoulders bottom pattern. Once this short term battle is over and the price breaks back above R2700 then all attitudes to gold in Rands will suddenly change. A bull surge is likely that will attack the resistance range of R3200 that impeded prices in 2002.
I again detail the various breakeven points for the Durban Deep mines and group. This is juxtaposed against my anticipated target of R3200. I leave you to decide on the future of Durban Deep. I reiterate that Durban Deep is far more related to the Rand price of gold than it is to the dollar price.
In the last issue I detailed the massive double top pattern on the Dow. I also detailed that “Apart from the double top there are two critical support levels that will have a major impact on the future of the Dow and all global equities. First there is the immediate support at 10 400 that has been tested several times. A drop under this level will trigger a further downside attack on the 9 700 support.” Thursday and Friday’s 325 point fall has produced the breakout signal and with the Dow under 10 100 I must expect an attack on the next support level at 9 700. A break under that support will trigger a straight fall back to the main resistance at 8 500. When we get there I will review the position. But the most dramatic aspect of this data is the fact that the oscillators are nowhere near grouping or even into oversold territory. This implies that the new bear phase still has some distance to fall before any serious rally will take place. A bear market in the Dow is good for gold as it continues to out perform all the leading currencies.
The price of silver in red is important to gold watchers. For the past year it has produced a massive symmetrical triangular pattern in red. This is a bullish formation. Triangles have a habit of catapulting upside once the pattern is complete. Silver’s triangle is virtually complete and I am expecting a serious upside move to start in the coming weeks. Meanwhile gold in black has formed a diamond pattern. Once again this is a classic example of the group effect. When silver breaks so will gold and they will both resume serious bull trends.
-- Posted Sunday, 17 April 2005 | Digg This Article
