-- Posted Thursday, 5 May 2005 | Digg This Article
Since 2001 the value of the Rand has more than doubled against major currencies as can be seen on the Rand-Index above. Despite a lowering of the interest rates by the South-African (SA)-Central Bank a few weeks ago, the Rand has not devalued noticeably. Nonetheless, one can see that the green upward trendline has been breeched in the middle of March but still being above the lower green support line. More, the Rand still holds above the red trendline which represents strong support as the breakout above was in the form of a one year triangle. The Rand is generating a sell signal when this red support level at 0.16 along with the lower green support line is being breeched. The RSI and MACD have reached resistances.
The general sentiment for SA mining shares is quite bad since quite some time now and might have reached the apex with the latest GFMS survey showing the unhealthy developments in the SA mining industries. In order to receive a buy signal for SA mining shares in general, one not only needs to look for a sell signal at the Rand-Index but as well at the Rand in Dollar. More importantly, the price of precious metals calculated in Rand needs to be rising strongly, so the mining companies can start making profit.
Since 2002 and the beginning of the downtrend of the Dollar, the Rand-Index rose strongly. The Gold price in Dollar terms rose strongly as well during that time. The effect on the Rand-Gold price was that it was declining successively since 2002.
As per the below chart(s), there will be either an explosive continuation or reversal of the ongoing trend very soon.
As can be seen above, the Rand-Index rose stronger than the gold and platinum price did in Dollar. The important aspect to notice is that this rise was in the form of a triangle which generally represents a “sideways”(!) consolidation period. The implication of a triangle is an explosion to the up- or downside. As the above 2 prices have reached the apex, the decision is soon being made. To generate one buy signal for SA-mining shares, the above prices need to crash as this would make the gold and platinum price rise strongly calculated in Rand.
The best and healthiest (in terms of sustainability) scenario for this to happen would be a strongly appreciating gold and platinum price in Dollar terms and a strongly depreciating Rand in Dollar terms.
Let’s first take a look at the gold and platinum prices in Dollar terms which are both showing that a big decision is soon to be made as the apex is being close:
As the Rand-Index was appreciating since the start of the Dollar downtrend beginning in 2002, the Rand-Index had strongly outperformed the Dollar by more than 200% in three years:
As outlined in previous contributions, it is possible that the Gold price in Dollar can rise despite a strong Dollar, but of course it would be even more bullish for Gold if the Dollar is depreciating further. In order to make the Rand depreciate against the Dollar, the healthiest scenario for the SA mining industry would be that the Rand is depreciating faster than the Dollar. Whatever being the case, the Rand/Dollar is moving in a triangular formation since the end of last year and has finished 4 waves in between the red boundaries (ideally, the impulse movement out of a triangle occurs after 4 waves). Even if the current red triangle breaks the lower leg, strong support lies at the green trendlines. Only if the Rand/Dollar is breeching the lower green trendline below 0.15 one can count with a strongly and sustainable depreciating Rand/Dollar.
As the general sentiment is quite bullish and optimistic for the Dollar at the moment, lets have a closer look at the Dollar-Index itself.
Since the beginning of the new downtrend of the Dollar in 2002, the price action was running in between boundaries of the “core” blue triangle whereupon 4 waves the impulse movement out of the triangle occurred. However, these impulse movements were not sustainable and were creating the “outer” red triangle. After 4 waves within the red triangle the impulse movement was pushing the Dollar out of the triangle (“Breakout”). The Dollar now can start rising strongly or crashing any time. However, we may witness a “Pullback” to the upper leg (or apex) of the red triangle, before the final decision will be made. An empirical study on triangles showed that mostly they are breaking out ¾ before the apex and not necessarily have to touch the apex before the final movement. As for the current Dollar “Breakout”, the violet trendlines show where such a move might go to. If the Dollar breaks the upper violet resistance, a move to 98 points is possible. Yet, it can be only a breakout with a Pullback following.
As its quite useless and risky to speculate about all the possibilities how the Dollar might behave now during the current „Breakout“ and if a sharp rise above the violet resistance might be either a sustainable “Thrust” to the upside or merely a Breakout with a potentially upcoming Pullback to the upper leg or apex, lets take a look at an even longer picture of the Dollar:
The Dollar is moving in dominance of a massive Head & Shoulder (HS) Formation. As its not definite if the price action of the first or second half of the 1990s is the left shoulder, it’s difficult to say which “the correct” neckline is.
The possible necklines are the green ones and have all been breeched as per the rule of a HS-Formation:
- Firstly: a short decline below the neckline.
- Secondly: a “classical pullback to the neckline”.
- Thirdly and consequently: sustainable crash.
The first two necklines have been breeched just like that. However, the Dollar is still doing its “pullback” to the third neckline at the very moment. A sustainable crash below the 4th neckline is due. However, what might happen now is a volatile price action comparable with the first half of the 1990s as to build a massive right shoulder going up to 100 points.
As Gold is not valued as a commodity these days but as a currency, let’s not only look at the Dollar-Index (which compares the strength of the Dollar against other paper currencies) but as well let’s have a closer look at the value of the Dollar in terms of Gold. As can be seen in the chart below, the trend since the middle of 2001 is clear: Down; which means that you need fewer and fewer of one ounce of Gold to buy a 1 Dollar paper bill. Since 2001 the amount of a Gold ounce required to purchase a 1 Dollar bill has more than halved:
More importantly – in respect of the above analysis of what the Dollar-Index might be up to in the next months – is that the above Dollar-Index relative to Gold price is moving in a Head & Shoulder-Formation since the 1990s as well.
The difference is that it’s easy to draw the neckline here. The price has already formed a right shoulder and even fell below the (red) neckline at the end of 2004. The “classical pullback to the neckline” is finished as well. The impulse movement of the HS-Formation is due anytime now: A sustainable crash. This not only implies that the ongoing trend (you require fewer and fewer amounts of a Gold ounce to buy a Dollar) since 2001 will continue but accelerate. As there are many possibilities on how this can be achieved (i.e. Dollar is declining & Gold rising, or Dollar rising & Gold rising stronger, etc) it’s useless to speculate about all the possibilities as long as the ongoing trend is continuing and the HS-Formation is finalizing correctly. The MACD is being pressurized by the triangular legs more and more and as well suggesting that an “explosion” is approaching.
Now let’s take a view of the Dollar valued in Platinum, on which chart we can see a similar trend:
The difference is that the Dollar relative to the price of Platinum has been moving within the boundaries of a triangle. The price recently made a “Breakout” above the green upper leg, so a decision is soon to be made. A Pullback to the apex is likely to happen anytime soon at which point the “Thrust” (either up or down) will occur. The MACD is suggesting that “something big” is about to happen in the coming weeks and months. The RSI recently shot up again, but facing the (red) resistance now. The previous rise by the RSI above the red resistance line was not able to hold on that new support, so it will be interesting if it will now succeed or if the recent shot up is only a “pullback” to say “farewell” to that resistance from below.
As shown above, the Rand has outperformed the Dollar by more than 200% since 2002. As the Euro was (virtually) perfectly negatively correlated with Dollar, the question now is: Who was stronger, the Rand or the Euro?
As can be seen above, the Rand was even beating the Euro: The Rand/Euro was appreciating up to 70% since 2002. However, since 2004 the trend has been moving sideways in a triangular fashion. As the price is close to the apex, the decision if this triangle is either a trend continuation or correction pattern will be made shortly.
As the Dollar has been breeched its upper resistance in the last weeks, the Euro is still moving upon the strong (green) upward trendline; whereas short breaks of this support lines have occurred in the past, whereupon strong upswings occurred. It is important that the red horizontal line will not be breeched for long and holds as support. The RSI recently jumped above the red resistance line and it would be a positive sign if it can be transformed into support to be able to shoot up even more.
Interestingly, the Goldprice in Euro is rising since the beginning of 2005. More interestingly, the (still) prevailing “sideways” movement since 2002 took the shape of a triangle:
The rise since 2005 is the impulse movement after having finished 4 waves within the triangular boundaries. The aim of this movement apparently is to break the upper leg as it already started to move upwards. The final round of the battle “Euro versus Dollar-Goldprice” started with the New Year.
The Silver price is already in an explosive Thrust out of the blue triangle since the beginning of 2005, but is facing strong resistance which was marked by the previous breakout. As soon as this resistance is being broken, the Euro-Silver price is poised to rise strongly to 0.070 (which is equal to about €7 per ounce):
The Silver price in Dollar has dropped sharply to its dominant 300 days Moving Average (MA) curve which represents strong support:
Taking a closer look at the Dollar Silver price movement since the end of 2003, one can see that the supporting lower leg has not been breeched in the last 2 days of heavy losses. As 4 waves are already finished within this triangle, a breech of the lower leg can occur, whereupon a strong backlash to the upside must occur immediately, or the price threats to fell sharply. The RSI-, PPO- (price oscillator) and Slow Stochastic-Indicators are at the green support lines at the moment. Same applies to the price relative to the Dollar. The ROC (rate of change) Indicator yet would have some room to the downside before final support is reached.
In the last days Silver was losing more heavily than Gold. A good question is whether Silver will be outperforming Gold in the near future. The next chart of the Silver-Gold-Ratio tells us, that a decision is in the final legs of being made:
The recent underperformance of Silver relative to Gold was heavy, but has reached support yesterday:
Not only the good old days of the artificially pumped up Mr Universe, the Rand, are likely to be over sooner than later, but the above charts also suggest that crucial decisions are being made soon, in which direction the markets will trend to. Whereas some triangles will act as a “correction” pattern of the prevailing trend, some will show their explosiveness as “continuation” pattern soon. As it’s difficult to speculate which ones will “definitely” shoot up or down, the only thing we can be sure of in the next years is that the Rand, along with its paper mates, will be found where they belong to - as being “paper”; or as François Voltaire puts it:
“Paper money eventually returns to its intrinsic value …”:
Source: www.madamandeve.co.za
References:
- See more great cartoons from Rico Schacherl & others on economy, currency and other aspects of daily life at the following great website:
www.madamandeve.co.za
www.rapidphase.co.za/Rico
-- Posted Thursday, 5 May 2005 | Digg This Article
