-- Posted Monday, 17 April 2006 | Digg This Article
Bullion touched $600 last week and that brought out all the forecasters of $700, $800 and $1000. Once again I must ask why were all these so called experts nowhere to be seen when gold was $250? Usually I am concerned when so many ‘experts’ forecast big gold bull markets. But in this case I am gratified.
If one subscribes to the Elliott Wave concept of a five wave bull market with three upward thrusts interrupted by two corrections then the psychology fits. The first wave of a new long term bull market is born in despair, doom and gloom. The first leg is greeted with distrust as the fundamentals continue to reflect the previous bearish trend. This is the time when technical analysts are at loggerheads with fundamental analysts. As the new bull market accelerates it reaches a critical mass at which point the new fundamentals driving the market become readily apparent. That is the case at this point of time. Distrust of the dollar as an investment currency coupled with the Chinese and Indian offtake and a rise in global investment demand in addition to rocketing resource and oil prices have pushed gold into prominence as the central pin of the monetary system.
The technicals and the fundamentals fit together and the usual strong third wave ensues on the back of almost total market acceptance of the bullish conditions. The final fifth wave is always the euphoria driven period in which every man and his dog becomes an expert and making money in the gold market is the easiest game in town. This is when the technicals start to show divergences and other potentially negative aspects that are generally ignored in favour of the fundamentals that indicate the run can go on for ever.
We have just entered the area in which the fundamentals and the technicals are in unison. This is potentially the most dynamic period of the long term bull run. It also signifies a complete change in the old concepts of what drives the market and leads to a rash of innovative philosophies about the new market forces. Suddenly there is an acceptance that gold has resumed its role as an investment currency. How many times over the past few years have I detailed the hugely bullish prospects for the gold price against all the leading currencies and especially relative to the world’s leading investment currency, the Swiss Franc?
Last week, when the gold price touched $600, the shares did not follow and the bullion price came back to churn around the $595 level. I expect to see an absolute powerhouse in gold shares when the $600 level is breached for the second time. This will be the trigger to push all the doubting sellers out of the market and promote a new gold share rush.
Meanwhile the oil price, as expected, has moved to a new high and should continue to power ahead over the next few months.
If there is one blot on the horizon it must be the Dow. It remains in limbo under 11 500 and continues to churn sideways apparently unable to decide in which direction to trend in the future. This area of investment is best left to its own devices until it has sorted out its new direction. But I will reiterate that once the breakout occurs there is a 5000 point potential move ……….. in either direction!! But the key investment area remains resources and especially the precious metal shares.
Silver is well out performing the gold price, as expected. Although the silver price has rocketed ahead during the past few months the RSI has also made new highs along with the metal price indicating that this is a stable bull trend, even though the immediate price is extremely overbought. This data points to much further long term upside potential for silver.
The Platinum price chart is still inside a bull trend but its relative performance against gold has turned negative. For nearly ten years platinum was the dominant precious metal, now it is the poor cousin and the others are all performing better, even palladium.
The Brent Crude oil price relative to gold is an interesting chart. The main bull trend in the oil price remains solid and a secondary steeper trend has developed in red. But although the grey relative strength of the oil price against gold remains in a long term bull trend there are signs of a shift in power to gold.
Note that the oil price has made new recent price highs that have not been confirmed by the relative strength. This is usually the first sign of a shift in performance towards gold. If this occurs then gold should play catch up with the oil price and the ratio move towards the 10:1 level. Thus oil at $80 a barrel, as I expect, would imply a gold price close to $800.
