Thomas
DeChastelain
Memorial Archives

Bullion Charts & Commentary
posted Jun 5, 2005 at 09:29PM

Introduction

Over the past few years gold has had many good weeks. Let me suggest that from a technicians's point of view none were as good as last week's. Indeed last week was so good that I am putting forth an argument that this is the beginning of the next phase of the gold bull. I am talking about Wave III type stuff. I am talking about inexorably rising prices for gold assets in all currencies. I am talking about a market that will become increasingly desperate to hold gold assets.

At the very minimum, my sentiments towards gold is the mirror image of that expressed in a short missive posted Nov 18 called HUI Sell Signal?. and a follow-up called HUI Planning Charts dated 4 Jan 2005.

At that time I was of the mind that the move through 240 would signal the initiation of a new impulsive leg up to new highs. There was certainly no obvious reason why gold stocks should not have gone up. Bullion and the Euro were strong, the USD was weak. The re-election of the neocons meant a continuation of foreign and economic policy that favored gold. But gold stocks did not go up. Indeed they broke back down below the 240 level upon which time I sold everything gold. And except for some cautious testing of the waters during some counter-trend bounces, I have been basically out of the gold market since then.

Last week was entirely different. I was expecting the week to start with weakness. Gold stocks certainly had every reason to not just to go down, but to plummet. The dollar was surging and the Euro plummeting - and yet gold equities not only held their ground, they started to move up. I bought gold stocks in strategic force, not just adding to trading psoitions entered the week before.

As stated previously the HUI crossing of the 18ema was interpreted by me as being a buy signal but my mind set was still within the framework of a counter trend play. Now I am of the mind that we are dealing with something much more significant.

True, the HUI has risen with a rising dollar before, but they have always been short-term anomalies. I find it interesting that although these "one-day wonders" were being trumpeted by the perma-bulls as huge portents, the last two weeks of outperformance is getting surprisingly little airplay. Even the "objective" analysts that I follow are mostly of the mind that we are still looking at a Fall bottom for the gold sector and/or a test of the 150 level for the HUI. The wall of scepticism is nice and thick. In my opinion, a good chunk of the market is leaning the wrong way.

As stated I think some thing significant is going on. I make this claim on the basis of:

a) gold equities moving up impulsively in the face of a currency environment that is usually disastrous for gold stocks

b) Bullion breaking out with respect to the South African Rand - historically a leading indicator for the sector as a whole.

c) Bullion at multi-year resistance with respect to the Euro, and more importantly, is in an optimum technical condition to break through.

d) With respect to the USD, bullion reversed strongly and finished above it's 65 week moving average, a metric, as identified by the Aden Sisters, of significant long term support.


So let us take a look at the charts to double-check that I am not being hood-winked by a sneaky market hungry for my capital.

Bullion Charts - Bending but Not Breaking

Gold Daily



As stated in past commentaries the triangle breakdown was still within the realm of "throw-over" A move back above the moving average convergence would reinforce the notion that the break-down was a throw-over...i.e. an exhaustion of bearish sentiment.

Many momentum indicators are on the verge of putting in confirmatory buy signals.

Gold Weekly



(Note: the blue dotted line should in fact be red to denote resistance)

The bottomed out stochastics, bullish diverging MACD histogram and bullish candle off of the 65 week moving average all bode well for northwards action.

Bullion Ratio Charts - Something Big is Happening

Gold Rand Price - Breaking Out



Gold Euro - "Tenth" Time is the Charm?



With the Dutch and French no votes putting in long term monkey wrenches into the system, it is hard to see the Euro going too far too fast. More importantly if you compare the above ratio to the weekly gold chart you will see that in the past, when Gold was at this resistance line, it was also usually at an overbought level with respect to the USD.

Not this time.

This kind of breakout would be a huge technical event, comparable to gold breaking out from the $330 USD level.

Equities - Surging Against Head-winds


HUI Daily



The lack of overlap implies impulsive type action. As well note that ground was recovered in half the time it took to lose. This kind of accelerated move is common in initiations of longer term trends. Even within the context of a swing trading mindset, it suggest that dips should be bought in anticipation of another leg up into longer term resistance lines. Indeed it is not hard to see how any dip would simply be shaping out an inverse head & shoulders pattern.


HUI Weekly



As stated last week, there is still a lot of heavy lifting to do before one can confirm that a new bullish trend has been reestablished - but so far so good.

HUI-Gold Ratio



Has moved back in impulsive fashion to challenge the breakdown point

The Green-Back - Last Act of Defiance?

USD Daily



This is an impressive looking chart. Clive Maund has described the channel break-out in terms of "throw-over". My gut reaction was "exhaustion-gap". That is reinforced by a record commerical short position.

But that is an anticipatory call. Until the USD moves back down, we are looking at a channel break-out with measured move targets in the low 90's.

USD Weekly



RSI has reached sine resistance rails and stochastics are topped out, suggesting, at the least, that a short-term retracement is due.

A lot of bearish arguments for gold, and bullish arguments for the dollar, rest on Fibonacci retracement levels. All I can reply is that, Fibonacci, undoubtedly a master mathemetician, never traded gold stocks.

Discussion.

Regular readers have probably noticed that usually I don't make big bold declarative statements of what the markets are going to do. I don't because such a tone implies a complete mastery and understanding of the markets along with the ability to predict the future. You don't have to look too hard to find examples of where this kind of hubris ends up with people with mud on their faces.

Obviously for reasons stated above, I am of the mind that recent lows will hold, and that we are witnessing the start of a major upleg in the gold sector. There are a lot of hurdles and tests which have to be overcome before the above prognostication proves to be accurate.

Now when one talks about "Wave III" type stuff, one is talking about something more than a major upleg. One is talking about moves which contain inexorable energy. Such moves need an overall "story", a set of circumstances which the market can easily identify as not going away any time soon. The kind of story and circumstances that makes it easy for investors to rationalize pouring money into the market even in the face of obviously overbought technical conditions. Yet perversely, the best of these stories usually hit the market as a surprise; indeed are initially interpreted as a negative to the market.

Perhaps the best example of this was the tech bull market of the late 90's. There the story was Y2K. On the surface Y2K was seen as a sort of secular armageddon, an event which would bring down the entire "system". It quickly became apparant however, that industry and inidividuals were going to be forced to spend lots of money getting ready for the event, and that this was all going to flow into tech companies bottom line. One of the "kickers" which gave the market its emotional juice was the advent of the internet - a development which promised whole new frontiers of economic activity and of course required many billions of dollars of more spending in order to set up the global infrastructure.

With gold we have the recent No votes to the European Constitution. At first glance this would seem to be disasterous for gold, given the correlation between the Euro and gold over the past few years. That is until you remember that the Euro has actually been a competitor to gold, and has been attracting investment for the same reasons as gold - i.e. getting the hell away from the US greenback.

Looked at another way, a lot of the money that went into Euro denominated assests as a safehaven was, money that was not available to go into gold.

That is very likely why gold, although enjoying a bull run, is still underpriced in inflation adjusted absolute terms relative to what it would have been if the Euro was not present.

While the no vote I believe is in the best interest of Europe itself, the Euro itself has been dealt a grievous, if not fatal blow. It is hard to see the Euro making new highs when finance ministers are talking openly about ditching it altogether.

And it is not like the USD has suddenly found itself in a new shiny set of circumstances. The huge fiscal imbalances facing the US are still present, and are still growing in size. Worse, anyone actually speculating on a dollar bull does so with the realization that a rising dollar will only make all of those problems worse, not better.

As far as "kickers", those stories which will give the gold market that emotional juice, I remain confident that geopolitics will provide plenty of motivation. With Venuezuela moving to nationalize it's oil industry, and with Syria and Iran playing around with new solid fuel missiles of North Korean design - well you don't have to part of the tin foil hat crowd to see how things can get out of hand very quickly.

Trading Strategies

Anyways time is getting short, and all of the above is deserving of a lot more detail but that will have to wait. In short I am expecting to see an upwardly trending bullion price acting as a powerful swell, propelling already postioned equity "surfers" to greater and greater heights.

In this case I would no longer wait to see gold vehicles breaking resistance metrics, instead I would use all dips as an opportunity to buy. If the above analysis is right then any such dips should be fleeting and shallow.

Good trading.

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