When the spot price of Gold rose faster than even some bulls expected, from the $320 area in November, to $388.50 on 5th February -- much of the investment world started waking up to the fact that a huge gold and oil bull market is underway. Yet between November and now, gold shares hardly responded and in fact have fallen again since 5th February.
Many reasons were suggested for gold shares not moving higher with the $Gold price -- the main one being that the move had been overdone and that there would be better buying opportunities for gold shares lower down. Another popular one was that golds won't run until the Rand weakens. Or how about this one -- that just as happened in 1991, as soon as the first fighting starts in Iraq -- the $Gold price will drop. In fact - an important trigger for the recent selling was the decision by futures regulators in the US to increase the margins by 50%. That forced many of those who were long on gold to have to sell when profit taking started.
For the most part, the sceptics who expect a sustained lower $Gold price - assume that the Gold is being driven mainly by war fears and terrorism dangers. I say no, there is a much more fundamental reason. A huge shift is happening in global investment patterns -- out of paper assets, out of US assets and into hard assets and into other countries. The US$ and Wall Street are corroborating this shift and the Gold price in Euro terms is telling traders to expect strength out of a technically classic rocket acceleration pattern candidate.
Furthermore, the Brent oil price which often moves higher or in tandem with Gold is in uptrend - suggesting technical scope for $56 and above from the current $32 - in a matter of months. A war in Iraq won't enable lower oil prices quickly. Saddam will rather sabotage his oil and that of his neighbours before allowing the Free world to have it.
So several macro indicators corroborate more domino effect deflation problems for the world economy. The next bubbles that are candidates for a burst are US property and US Treasury Bonds. No country in a declining growth environment, can sustain record high levels of personal, corporate and public debt, a huge trade deficit, the cost of the war on terrorism - as well as potential for a war in Iraq and in North Korea.
The action of the US$ in the last two years suggest that the world has decided that the big growth years of the US of the last few decades are over and now is the time to move into something else and somewhere else. Some of that money is already moving into Gold.
Incidentally, those canny traders China, Dubai and Malaysia - last year established active gold exchanges to cater for the demand for gold bullion and gold coins. Traders on the bullion and futures desks know where the major pressure of buying is coming from. They say that in recent weeks much of the buying came from China, Japan and the Arab world. Yes, some of that buying is obviously war related -- yet the scale of the buying and asset shifts dwarf 1991.
Traders don't act without reason. And they also certainly take into account that North Korea can now put missiles with nuclear bombs on the Western U.S. seaboard. And they most certainly notice that Mr. Bush and Mr. Blair must know more about the dangers from Iraq and terrorism than they can say.
Another factor is that there is some evidence that central bankers the world over - acted in concert since at least the mid-1990s -- to support a stronger US$ and a weaker $Gold price and to achieve returns from what was seen as a depreciating asset. Through complicated short sales, leases, swaps and even outright sales -- evidence shows that previously a significant portion of sacrosanct reserve assets in the form of gold are gone. In its place is merely a claim against a financial institution or bullion dealer for its return. Yet that institution or bullion dealer - now also under pressure in a declining earnings environment - is now having to buy in physical gold or its equivalent in futures contracts, very expensively -- at a higher $Gold price than expected.
A further dump of the US$, for whatever reason -- among the many factors which make the US and its currency vulnerable right now -- could fuel a rocketing $Gold price to above $500 an ounce -- which would in turn fuel more short covering and more demand for the physical metal. The mines can only produce so much -- they need years in order to expand production. Since 1996, the demand for the yellow metal has exceeded supply. Central banks sold their holdings that kept the price of Gold down - but now those banks are no longer sellers. In fact they may be sweating about how to buy back the gold that enabled profitable swaps and leases.
The fundamentals are in place for one of the biggest gold price squeezes in history. Technical and long-term cycle factors are also strongly corroborating. An ( unlikely) "quick war" in Iraq won't kill the gold price.
Assuming a new long-term gold bull market then, doesn't the recent pullback negate a super trend, a rocketing Gold price scenario? No. Some damage or delay in the trend's performance perhaps - but while above the $332 area - medium and long term technical trend profiles favour a super bull- trend underway.
The fundamentals and cycles are still in place for more upside in coming months, but technically there is now some scope for several days or weeks of "WWW" consolidation before the next upward push. On the other hand - even the sceptics will want to be aboard on super trend prospects when the $Gold price goes above $359 or other technical resistances again.
In a super trend scenario -- trend acceleration sometimes doesn't allow very large or long dips in the bigger trend -- as many rueful investors experienced in the first five months of 2002. Some who hesitated, missed the boat, or even worse -- eventually got on board in May when many JSE gold shares were near their peaks. To the disgust of those investors, many of whom had in any event been sceptical about a bull market, or had been burnt by golds before -- were again disappointed when their favourite shares fell by 40 or 50% between May 2002 and November 2002. During that brief downtrend, fueled by a stronger Rand, it felt like gold bulls had got it all wrong. It was very difficult to buy gold shares during that phase -- because most stockbrokers and many commentators were warning of limited upside.
Nobody has a perfect crystal ball, yet there is lots of the evidence that this is a dip buying opportunity for gold shares. A higher $Gold price is likely on the technical, cycle and fundamental supply demand factors mentioned above.
Perhaps the biggest risk is that the Rand strengthens in coming months as the global community sees prospects of good relative growth in South Africa, as well as good debt discipline. Our analysis systems show tentative behavioural evidence for the Rand moving to the ZAR/US$650 area or even stronger, in the next 18 months, helped also by scope for a 30% weaker US$ [US$Index].
In that scenario, JSE gold shares may pause and not do much until the Rand price of gold shows scope to work above R3300 p/oz again.
With the Rand at say ZARUS$7.50 - that would need a $Gold price above US$440. Every 10 cents towards or below ZARUS$790 would corroborate scope for a stronger Rand. Trending or action above ZARUS$8.48 in coming weeks would boost golds. The good news for South Africa is that a stronger Rand will be great for our long-term growth and for inflation. And golds will have their day even if the Rand strengthens beyond consensus expectations. A $Gold price to or above $500 perhaps before middle of next year - will encourage many a gold bull.
Gold shares are at useful buying levels. Buy here and in dips.
Victor Hugo is a Trend and Cycle analyst for www.HugoCapital.com and www.saGOLDS.com
-- Posted Monday, 17 February 2003
