-- Posted Tuesday, 18 September 2007 | Digg This Article

Without doubt the lead story of the past two weeks has been the surge in the gold price as it broke upside out of the large triangular patterns that had confined it for the past 18 months. I have continuously detailed these triangular formations that have been in progress on the gold price in every leading global currency.

Breakouts from triangles have a special significance. During the formation of the pattern the fundamentals are uncertain and the price bounces up and down reflecting this indecision and hesitancy. But at the point of breakout all the uncertainty is resolved into a new set of fundamentals that dominate the next upward surge. A large degree of the uncertainty stemmed from the sub-prime rate problems in the US. The tidal wave effect of this crisis caused doubts to be cast on the future direction of consumer spending and global growth. However the central banking system has made it abundantly clear that they have rallied round to cut rates in order to attempt to alleviate the major effects of the sub-prime debacle.

I attended a very interesting presentation a week ago at the monthly TASSA (Technical Analyst’s Society of Southern Africa) meeting that discussed the sub-prime difficulties and the reasons for the debacle. According to the speaker it transpired that financial houses in the US bundled together parcels of BBB rated bonds and somehow persuaded the rating agencies such as Standard & Poor, Moods and Fisk to rate them as an AAA risk. The bottom line is that this is tantamount to fraud. The spin off from this rate fiasco is that the rating agencies have some fast talking to do in order to repair their status.

Irrespective of the reasons the gold price against all leading currencies has broken upside out of the triangular patterns with a typical surge. The full implication is that gold has once again become the centre pivot of the currency system and there is a worldwide flight to protection.

When the triangular breakout on the bullion price is transposed onto the share charts there are some huge potential upsides out of the massive 18 month period of churning. My long term counts indicate that over the next three years we could easily see a trebling of share prices if not greater leverage.

Meanwhile the Dow bounced back upside to hit the 61.8% retracement level of 13 450 on the nail before moving into a churning pattern. I remain bullish on global equities and continue to look for the Dow to hit my long term target of 15 500. A new push above the resistance level at 13 400 will confirm the continuation of the major bull trend. As I have so often detailed, sudden falls in stock prices are usually the final C wave sell off from an old correction and not the start of a new bear market. I stick to this analysis for the equity sell off. I rate it as a serious buying opportunity and not a period in which to panic.

As expected Brent crude oil has penetrated the $80 a barrel mark and the base metal prices are ready for the next bull run after their period of consolidation. All my data continues to point to the resources arena as the performing sector of the market but you should keep an eye on the financials if they start to break above their short term resistance levels.

In the last issue I detailed that Brent Crude Oil had mapped out a reverse divergence situation in which the RSI had made a new recent low L2 that the price has not confirmed. This was a trend continuation signal. It also indicated an upside target of around $84 for the oil price. This was rated as a bullish scenario. The price has moved above $80 and should hit target in the near future.

Bullion shot out of the confines of the triangular pattern as has the gold price in sterling and Swiss Francs.

 

In the last issue I detailed that large scale triangular patterns of this type usually lead to very strong upside catapults once the breakout occurs and that the break above $680 would trigger this upside break. This has occurred and bullion has entered a new bull market phase. The first stage upside target out of this triangle is $850

 

 

The Euro price of gold also had the same triangular pattern and the move above E500 was be the signal for the breakouts by bullion against all the other currencies. In the short term the gold prices are overbought but I only expect a few days breather before a resumption of the main bull trend. There are no dangerous divergence signs.

 

 

Copper has also been triangulating on both the metal price and relative strength against the Dow. It is brewing up for another upside surge. My reverse head and shoulders pattern has indicated an upside price of $11 000 and I stick to this target.

 

 

The DJIA bounced back up to hit the 61.8% retracement level and has since churned at this area. It needs a break above the 13 450 resistance to continue the bull trend.

 

 

The FTSE 100 index has been forming a reverse head and shoulders pattern over the past month. A break above the neckline resistance at 6400 is required to continue the bull market movement.

 

 

The HUI Goldbugs index has been trading inside a rectangular pattern for the past 18 months. This same pattern is reflected across the board on the global gold indexes. It needs a break above the top resistance line to trigger a new and powerful bull trend. So far the sharp bounce has only played catch –up. The real bull trend has yet to start.

 

The FTSE Gold index also has the same rectangular pattern but in this case the recent price has pushed above the resistance and looks set for further upside after a short period of consolidation in its immediate overbought position.

The JSE Gold index in $ had broken upside out of the long term downtrend in 2005. It has, as I have often analysed, formed the big first I-II correction and broke upside from this in 2006. It has recently formed the smaller 1-2 correction in big wave III. There are still the large bull waves 3 and 5 to come before we hit the next serious correction at the top of wave III. I reiterate that this is a massive LONG TERM bull market in gold shares that has only just started its move into wave 3. There is a huge distance still to come in this sector.

The JSE Gold index in Rands has an awful lot to its chart. The first aspect is the large irregular Elliott A-B-C correction that is the first correction 1-2 in big wave III.

 

Second it must be noted that the low of wave C only just went under that of wave A. This is Elliott configurations is a weak correction and heralds a strong forward move.

 

The third aspect is the flat top broadening pattern at the end of wave C that I have so often detailed in this report and all the daily data. This broadening pattern still has to break above the top resistance at 2800. When it does so it will trigger a minimum upside count to 3500 on the index.

 

Finally there was a serious buy divergence on the RSI that accompanied the broadening pattern indicating a reversal of trend. This trend reversal is not just the end of the immediate downside sell-off but the end of the 18 month total correction and is the start of the new move into wave 3 that, according to Elliott, MUST break back well above the top of wave 1.

 

 

This chart puts the big I-II and recent 18 month 1-2 corrections into perspective on the JSE Gold index.

 

 

 

The JSE gold index is compared to the JSE Overall index. This is an interesting chart from several aspects. There is no doubt that the blue relative strength line has underperformed the general equity index for the past 22 years. In fact it is at its lowest oversold ebb ever.

 

But it is interesting to note that every time the index has hit the low levels there has been a strong upside reaction in the index. This occurred in 1998, again in late 2000 and more recently in 2005.

 

The implication is that relative to the general equity market the gold shares are massively oversold and that a strong relative strength reversal can be expected.

 

The 1998 bounce produced a rise of 130% in the index whilst the surge from late 2000 yielded a 500% move and the more recent 2005 lift off resulted in a 110% increase.

 

The 1998 to 2000 period move of 130% was during a base formation. Whereas the 2005 upside was a smaller move up to wave 1 of the new bull trend. The big 500% move was in the first true leg of the bull market and we are about to move into wave 3 of another big bull leg.

 

Traditionally wave 3 is the longest and strongest leg of the Elliott five wave configurations. Thus we have entered a far more serious move in terms of Elliott and I would expect a rise well in excess of the 100% levels and more towards the 300% probability.

 

This is a new MAJOR BULL market and not a minor move. We are only into wave 3 of big wave III and there this wave 3 followed by the final wave 5 still to be completed. AND that is only the end of wave III. After a reasonable correction in wave IV there is still the large wave V to come.

 

I must reiterate that this is a LONG TERM MASSIVE bull market in gold that has several YEARS to run.

 

 

The JSE Gold is shown against the JSE Platinum index. For the past 22 years the gold index has underperformed. But all this is about to change and the gold shares are ready to leave their platinum cousins in their wake. I have often detailed that the platinum price has under performed the gold price for the past decade, well the gold shares are about to have their day, weeks and years of superior performance.

 

 

Gold has basically out performed platinum since 2000. But this was effectively a base formation on the relative strength chart. This picture is about to break strongly upside in favour of gold.

 

 

Gold has underperformed silver for the past 20 years. But that is about to change as the yellow metal is starting to break upside against its whiter counterpart. The next move will be a strong out performance by gold bullion.

 

This has extremely powerful implications.

 

I am NOT looking for a precious metal bull market, but for a big gold market with the others as hangers on. The implication is that the bull market will be gold driven due to the global flight to protection.
-- Posted Tuesday, 18 September 2007 | 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.
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