SOUTH AFRICA'S RECIPE - HOW ARE WE CONCOCTING IT SO RIGHT?
Golds
After weeks of work to get up to the $380's just about every precious metals trader I talk to confirms that the footprints and timing of price action in recent weeks suggests massive intervention perhaps at G7 central bank level - by those interested in protecting the value of US bonds and the US$. And that is just about everyone except China and the Middle East who have been quietly buying gold for several years while the West has been selling it.
The alternatives to a strong US$ are too ghastly to contemplate. Further acceleration in the departure from the US$ with some of the money going to gold, would reduce the status of the US$ and by implication, the status of US Treasury Bonds and Wall Street. A lot is at stake.
So when they managed on Friday afternoon to get the $Gold price down from about $384.00 to $366.60 in a matter of an hour, at the same time as the Euro and Japanese Yen and SwF were strengthening -- it was not surprising. The Fed intervention is now being openly talked about in New York. Yet it should be noticed that the typical 2.0 standard deviation upward channel since April's lows is still intact while above $356.40 (Comex GC Dec03).
The question is how long and how often the Fed and supporters are going to be able to convince the world that this type of price action is real, not an act of desperation. Notice the similarity with the attempts by the Japanese government to keep the yen weak. The protection attempts at $JY120 and $115 conclusively failed, despite trillions of yen being sold and thrown away.
The madness, confidence, fear and knowledge of crowds cannot be beaten by government intervention. Finally, even government intervention is a contributor to the markets and that intervention is itself a marker of confidence and a lack thereof.
A bottom-line problem lies with the inability of the financial system as it is now - to support the US$ which has become worth less. Another bottom-line problem and opportunity is that the supply situation for the yellow metal is just not keeping up with the demand. In fact World Gold Council figures suggest there has been an annual shortfall since 1996, which even earnest selling by the British, Australians, Swiss, Dutch and others could not satisfy. Traders believe that much of the steady and sustained buying in recent years has come from China and perhaps to a lesser extent, the Middle East.
Years of cheap lending and swap arrangements by bankers and dealers - who have been encouraged to do so by their own central bankers -- as well as a macro environment that supported an incentive to yield a return -- and leveraging opportunities from the usually non-performing gold -- has resulted in huge short futures positions, enough to put plenty of institutions and banks under severe pressure, should the short positions have to be unwound by buying into a runaway market. Traders think the runaway point is near $400 where many institutional holders will be forced to buy in physical. Trouble is the borrowers have onsold and much of the gold is on wrists and under beds in Asia, or inaccessibly in China's and Middle Eastern reserves.
In the past, there was apparently no problem. There was the perception of an almost unlimited supply from willing central bankers such as the bonny English that sold happily in the $260 's from 1999. Now, slow growth and global deflationary pressures are putting those banks and the central bankers under more scrutiny. More and more questions are being asked as to how much gold has actually been leased or exchanged out -- or sold. And how much cannot be bought back, because it is under beds in Japan and in vaults in China and in the Middle East and on wrists.
According to the Gold Anti Trust Action group [see www.leMetropoleCafe.com], well researched estimates put the shortage out there represented by mere claims usually against other financial institutions, not actual possession - the way I understand it - at some 15,000 tons or five to six years of free current global mining production. They say that their attempts to confirm this research have been met by stonewalling and lack of transparency.
For years though, GATA has built up a credible explanation for the $Gold price being depressed -- despite fundamentals more supportive now for a higher gold price -- than in the 1970s -- when the $Gold price rushed higher on mere inflation fears, from the $100's to $850 in a few years.
The debate rages on between those who call the yellow metal an archaic relic from history, a mere industrial commodity - ignoring the monetary and exchange and emotional role of gold for thousands of years.
On the other side there are those that say that gold which normally has no corresponding liability, will always be the most important unencumbered reserve asset ( after food) and medium of exchange.
Trouble is that the only time gold prices accelerate higher, are in times of crisis of confidence about currencies and asset values. So most of the world tends to hope for the best - that there will be no important changes from the US$ standard - and that confidence wobbles will dissipate.
Perhaps they are right - but the imperialistic war of Western values vs. Chinese and Middle Eastern agendas is not making it easier for the US$ as the US battles to encourage sanity in the world. That cultural and imperialistic war has no loyalty to the US led global financial system. China likes its effectively subsidised trade status as the US$ weakens - but is already the next global industrial power. They and an angry Middle East are not going to lift a finger to help keep the US as global financial leader - which makes extended US deficits and debt all the more worrying -- until global demand turnaround proves itself.
Back to indicators. First, the US$ Index now at 93.23 is showing a high probability count for more weakness next and for next year or in 2005 to 82 or to 72 or lower. A US $ 23% or more weaker from here, to below 1992's levels - is a scenario that suggests that the US has decided to print more money to pay its way out its problems. But that escape also exacerbates the problems as debt becomes more expensive to repay. I am assured that the Chinese and Japanese and Arabs are between them the biggest holders of US Treasury Bonds.
So to keep the faith in Treasury Bonds and to have a chance of working out of its debt and spending hole, the US has little choice but to again try to stimulate its earnings growth with more rate cuts - which is what the US Long Bond holders are still hanging in for.
But I expect that the next rate cut when it comes, may have just the opposite to the desired effect i.e. be the trigger for foreign holders to sell US Bonds and the US$. My count systems are pointing for the US 30 year Long Bond yield to go 22% higher ( i.e. price and value lower) to 6.22% during next year. Interestingly, this projection pretty much fits the counts on the US $ (above). Already, the trend has changed from the US Long Bond at 4.135% in June to the current 5.098%. The market which is anticipating another rate cut, is not impressed and is still selling.
All this is corroboration for my long-term counts on the $Gold price that show already next year that the $Gold price will work resistance at $451, come back and consolidate - and then go on higher e.g. in 2005 and by 2006 to other count scenarios at $540 and at $608 and at $728. The actual numbers will change along the way with pivots attained - but this does describe the size of the giant bull market we could be in. A massive gold bull market is here - in which those willing to see it are already getting powerful corroboration from technical factors (momentum confirming from a huge base going back 21 years); and from cycle factors (a 9 or 18 or 21 year bull market); and from fundamental perspectives (confidence in mediums of asset valuation and exchange issues); and from macro geopolitical pressures (Western values vs the Rest).
So what to do now that your favourite gold mining shares in which you are probably already invested, appear at first glance to be in free fall. Reminds me of last year when the $Gold price kept going up, but shares in SA headed sideways and down as the Rand strengthened. Well the way one can look at this is to take some decisions for yourself.
Firstly, do you agree that the US$ and global financial confidence will crack and sell big enough to cause more investment interest in gold? Most of us answer yes.
Secondly, do you think that the US and G-7 efforts to preserve the US dominant global financial system status quo -- will be successful -- or will these efforts give enough of a window in which the ever resourceful US can do an Houdini escape? Here is where most of us battle to believe the bad news. All I can suggest is to do your own research. The answer that I have come to is that yes, the US will do its Houdini, but it will cost a much weaker US$ as the US continues to print money and as the US falls into its old trade protectionist trap in an attempt to protect US domestic jobs, causing an extended global recession or depression. Along the way, the $Gold price and the Gold price in most currencies will accelerate at least 30% to 100% higher, depending on the financial and geopolitical shocks along the way.
If I'm right on this, it is still the time as I have been advising since beginning of last year, to buy the dips in gold share prices and stay with quality golds if you are a medium term investor. In US$ terms Goldfields and other blue chips are still near their highs of May 2002. In Euro terms, not much performance, but enough base- building evidence to suggest still good appreciation potential to come as well.
Point is that if you expect the macro fundamentals which are supportive for gold to change in coming months, then you have to reduce exposure to Gold shares. If you expect those macro fundamentals to stay where they are or get more intense [the US $ weaker] -- I suggest you continue to accumulate Gold shares on a medium term view, using the dips as buying opportunities. If you are a trader, you get out when there are short-term technical sell signals and you buy again when there are short term technical buy signals confirming the medium and long-term technical buy and hold signals. You takes your choices.
Most of us don't have the time and tax profile and appetite for brokerage costs to jump in and out every time trend counts or oscillators warn of minor profit-taking or pause. Notice that despite all the factors which hit SA and other Gold shares in 2002, the 50 and 100 week up trends have hardly faltered in US$ terms and even in Rand terms.
A negative is that the Rand is heading stronger. See the discussion above. I am calling 6.60 to 6.40 on swing targets provided the current reaction weaker ( Rand at 6.91 at the close in Chicago on Friday 3rd October) does not go above 7.32 next. If it does, there can easily be a retest of support at $ZAR 8.08 -- but guess what that will do to Gold shares? Easily a 20% Christmas gift, assuming $Gold holds above $356.40.
Question is whether the Rand going to e.g. 6.60 this year will do anything more than slow the advances of South African Gold shares. I don't think so. The three month cycle to January is supportive for the $Gold price and there are too many economists and Afro sceptics expecting the Rand to stay at least in the late $ZAR 6.00's and even more comfortably in the 7.00's. For now, even Rand bulls are being careful to call anything below $ZAR 6.40.
But you may argue that this was also the case when the Rand was in the 8.00's. Answer: from $ZAR13.90 to 8.00 was big, but 13.90 to the expected 6.40 is bigger and riper for a juicy e.g. 13% reaction weaker before we go to the 5.00's. Bottom line though - we may not see upward acceleration on SA Gold shares until the Rand hits a rocky patch (all it needs is a politician frightening foreign investors again - or a global shock ). But if I am right and I am! on the $Gold price heading to the $540 to $608 range in the next two years, but perhaps only in 2005 - even with the Rand at the $ZAR 5.40 support - SA gold shares can do well.
Phases of Rand weakness along the way can add fuel to the gold runs. Another factor little talked about is that as the Rand strengthens, inflationary cost pressures on the mines decrease and more mines will be forced to do what Durban Deep has done i.e. retrench labourers and get leaner -- shocks in human terms -- but good for the share prices.
Conclusion: no, Gold shares are not rationally going ballistic soon [maybe me saying that makes sure they will!]. Rather one has to decide on whether to trade the swings or be a buy and holder on dips, relying on the medium and long term bull. Veteran newsletter writer since 1959, Richard Russell, says - don't mess around, just buy the good shares on dips and sit it out...... that it will be the hop- in- and- outers who miss the gold run. Well, he does not have to contend with a stronger Rand. A weakening US$ is on his side. Yet I agree with him. I still think that once sentiment really gets going and the extent of the US's problems become known and the Gold price starts doing gap days of $13 and more (upward!), as happened from 1976 -- gold share buyers will become more interested in buying gold run sentiment than in worrying about the implications for earnings from the Rand Gold price.
Okay, so let's have a look at some levels and trends in individual shares. For our non-SA readers we will be looking at US$ levels for most of the NYSE listed SA Gold shares in our new www.GoldSignals.com GOLDSIGNALS service.
(for subscribers only)
Best regards
Victor Hugo
www.HugoCapital.com
www.SAGolds.com
www.GoldSignals.com
-- Posted Monday, 6 October 2003
