Contents
Volume 2, Issue 41, 08 December 2011
Introduction
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Gold Wave Analysis
XAU Analysis
API Analysis Australian Theoretical Gold Price Update Closing Comments Disclaimer
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SOMETHING IS ABOUT TO GIVE Last issue we discussed the need for the general markets to become heavily oversold before we get the next meaningful rally in gold stocks. At present, you really do get the feeling things are fragile. It wouldn’t take much to spark the next major sell off. Many market participants presently share this view. Contrarians might argue that this is a sign that a major reversal higher is imminent. I for one disagree. The first two charts below look at the Dow Jones Index and the Australian All Ordinaries Index. As I see it, we are presently in a wave 2 rally higher which is starting to look a little long in the tooth. Government and Central Bank intervention is trying desperately to hold things together, but the collapse they are fighting doggedly to avoid seems inevitable. They’re hope, of course, is to water down the effects making things more palatable. As we touched on last issue, the past major corrections in the markets (blue circles) have all ended in deeply oversold territory (weekly RSI sub 25). It’s difficult to see this occasion playing out differently. The top section of our two charts looks at the XAU and the API respectively. Both indexes, whilst close to record highs, remain vulnerable. Despite reasonable fundamentals, gold mining companies trade on the same exchanges as everything else. As markets tumble they become guilty by association. Nothing scares a market participant more than the drying up of liquidity and the inability to get a “fair” price. Most prefer to sell rather than hold on. Fear often trumps strong fundamentals. For the XAU, my guess is 150170 looms large as a potential downside support target. For the API, I have drawn a potential line in the sand at 750. As for the Dow Jones and All Ordinaries indexes, we have downside targets of 9,600 and 3,300 respectively. From these deeply oversold levels, I think both the XAU and API will have the potential to double in very quick time as money reenters the gold sector. My guess is both the gold price and gold shares will likely make new highs towards the second half of 2012. The third chart below is our COT report which analyzes the commercial open interest in the futures market. The net commercial short position continues to make its way lower, consistent with a consolidation in the gold price. We briefly entered the bullish green zone which saw the gold price rally back up towards US$1,800/oz (a to b rally: see Gold Wave Analysis section). My feeling is we will see a second more pronounced move into this zone, marking the completion of this consolidation. It is more than likely to occur in conjunction with the next wave lower in the markets.
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Dow Jones versus the XAU
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All Ordinaries versus the API
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COT Report
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Gold Wave Analysis Update
COMMENTARY Last issue (Sep 2011): “If our recent highs are in fact a temporary peak, my feeling is we could now see another more conventional consolidation phase for the metal with perhaps a trading range of US$1,500 – US$1,800/oz. I see this occurring within the current corrective phase of the markets which could see a market bottom put in by October/November.” Whether we may or may not have seen a market bottom put in, the gold price has been consolidating more or less within our range. Again we are looking for the primary “a, b, c” pattern to mark our consolidation low. By my reckoning, we may have recently put in the a to b rally and are now awaiting the b to c correction, possibly taking us back down to the US$1,550 US$1,600 level. This would more than likely occur in conjunction with a sharp fall in the main stream markets. If the fall is particularly severe and we see the 10,000 level taken out for the Dow Jones, we may even see the gold price briefly correct down to US$1,300 – US$1,400. This would present a wonderful buying opportunity. In this issue, we have also included the XAU to demonstrate the “a, b, c” pattern it also tends to follow. If the gold price has commenced its b to c correction, I would expect the XAU to correct back down towards the 170 level. If the fall in the gold price and general markets is more severe, then we may see support tested at 130150.
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XAU The chart below highlights key points in time when the XAU is overbought (RSI 35) and oversold (RSI 70), relative to gold (opposite to our usual understanding of RSI). Once the respective indicators trigger (blue vertical lines), it then becomes a task of following trends in the ratio looking for definitive breaks to signify entry (green vertical lines) and exit (red vertical lines) points for gold stocks. The gold price wave analysis above helps us get our bearings. Our last definitive buy signals were in November and December 2008 (during the GFC) and we unfortunately never saw a definitive overbought indication (RSI less than 35) although one came very close to occurring in March 2011 (our Australian analysis below got a definitive breakdown). This period has seen gold th stocks rally 119% along with the gold price which is up 92% through to the 11 of March 2011. Since then, we have had the usual outperformance of the gold price which has beaten gold stocks by 33%. We are now awaiting an entry signal to point out the ideal time to become overweight in gold stocks once again.
GOLD/XAU LONG TERM PICTURE
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GOLD XAU RATIO Extreme Key Dates
Gold/XAU
XAU Performance
Gold Price
Gold Performance
Net Position
30/08/2002
4.50
69
10%
313
3%
7%
23/12/2003
3.94
104
51%
409
31%
20%
20/08/2004
4.29
95
9%
411
0%
9%
03/03/2006
4.12
137
44%
565
37%
7%
28/11/2008
8.02
102
26%
815
44%
70%
11/03/2011
6.83
223
119%
1,412
73%
46%
Current (05/12/11)
8.65
201
9%
1,744
24%
33%
XAU
GOLD/XAU INTERMEDIATE TERM
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COMMENTARY Gold stocks continue to be in a holding pattern awaiting direction from the mainstream markets. The Gold/XAU ratio is effectively trading in a range between 8 and 9. A break through 8 would be bullish and potentially signal the beginning of the next substantial rally in gold stocks. A move through 9 would be bearish and signal short to intermediate term pain. The best part about using this indicator is there is no bias. Whilst my outlook remains firmly negative (I expect 9 to be taken out), a definitive break through the 8 level would force me to reassess my outlook. It would suggest to me the possibility of a strong intermediate term rally in the XAU to new highs (say 270280). You certainly couldn’t rule this out and it would be consistent with the views of contrarians who feel there is far too much negativity out there. We will follow this intriguing battle over the coming weeks and months.
AUSTRALIAN PRODUCERS INDEX (API) The Australian Gold Producers Index has a consistent format to that of the XAU. The relative strength comparison is with a USD gold price instead of an Australian dollar gold price. This is because Australian gold shares tend to be influenced more by the USD gold price.
GOLD (USD)/API LONG TERM PICTURE
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GOLD (USD) API RELATIVE AMOUNT Extreme Key Dates
Gold/API
Gold Performance
Net Position
25/07/2003
2.39
152
17/10/2003
1.97
188
24%
370
2%
22%
08/07/2005
2.14
198
5%
424
14%
9%
17/02/2006
1.27
435
120%
552
30%
90%
19/12/2008
2.30
363
16%
836
51%
35%
28/01/2011
1.45
907
150%
1,319
58%
92%
Current (06/12/11)
1.63
1,045
15%
1,708
30%
15%
API
API Performance
Gold Price 363
GOLD (USD)/API INTERMEDIATE TERM
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COMMENTARY Last Issue (Sep 2011): “I still think the index is due a correction before we get our gold stock buy signal. If the drop is shallow I would expect 850 to hold. If the gold price doesn’t fair so well, I would expect the next level of support to be 750. We will continue to monitor the API/Gold ratio for clues of a potential major rally in gold stocks where the shares outperform the metal. We have already hit the gold overbought/gold shares oversold RSI level (RSI 70) twice signaling we are getting closer.” We had a sharp fall to as low as 892 before the API rallied back strongly to over 1,050. The Aussie gold sector has been very tricky to read. The chart of the API is much stronger than the XAU and is presently forming a symmetrical triangle, indicating an undecided market. The Gold/API ratio has broken in a bullish fashion signaling future strength. If this were to continue falling and break the next trend line at about 1.6, coinciding with the API breaking up out of the triangle, this would provide further confirmation of the bullish intermediate term trend. Given my bearish bias I remain cautious.
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AUSTRALIAN THEORETICAL PRICE OF GOLD UPDATE Date Jun11
10 Year AGB Interest Rates 5.16
Headline CPI 3.60
M3 Aggregate Money Supply 1,341.0
Rate of Australian M3 Change 0.0005%
Gold Production Av Annual Increase (1.73%) 0.14%
Australian Theoretical Gold Price 4,027.52
Actual Gold Price (AUD) 1,401.89
Actual as a % of Theoretical 35%
Jul11
4.81
1,352.6
0.8650%
0.14%
4,056.72
1,486.67
37%
Aug11
4.37
1,354.8
0.0016%
0.14%
4,051.11
1,696.29
42%
Sep11
4.22
1,389.7
2.5760%
0.14%
4,149.79
1,656.27
40%
Oct11
4.51
1,395.6
0.0042%
0.14%
4,144.16
1,638.59
40%
3.50
7 Year Performance Snapshot 2011/12* Actual Gold
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
17%
4%
26%
19%
26%
16%
18%
Theoretical Gold
3%
8%
3%
13%
17%
14%
16%
M3 Growth
4%
9%
4%
14%
19%
16%
17%
3.5%
3.6%
3.1%
2.5%
4.5%
2%
4%
CPI (Latest) * This financial year so far.
M3 Growth (%), 10 Year Government Bond (%) and Gold
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Gold (A$) Versus M3 Growth (%)/10 Year Government Bond (%) (3 month MA)
COMMENTARY M3 is again growing at close to 10% (annualized rate) versus a 10 year bond rate which at the time of writing has declined to just 3.95% (4.51% as at Oct 11). As the above chart demonstrates, these conditions are Aussie gold price friendly. When money supply growth is strong and interest rates fail to keep pace, this creates a climate where the purchasing power of money is eroded. In the above chart this is demonstrated by the blue line, which denotes the ratio of money supply growth to long term interest rates in terms of a 3 month moving average. When this is trending higher the Australian dollar gold price is strongest. When we get a substantial decline in this ratio, as we did in 2009/2010 (circled area), the gold price becomes subdued. Fast forward to the present and we can see this ratio is firmly entrenched in an uptrend. With the RBA cutting interest rates and all the turmoil surrounding Europe, this has set the stage for a friendly Aussie dollar gold price environment. If we look at the price chart of the Aussie dollar gold price on the following page, we can see we are presently consolidating inside a symmetrical triangle signaling a cross roads scenario. Using the above chart, we can surmise that the balance of probability is tipped in favor of a break to the upside. This would also be consistent with our bearish view on equity markets. Another significant wave lower would see the Aussie dollar come under immense selling pressure. As in 2008, this would be more than enough to offset any short term weakness in the US dollar gold price (our b to c correction as discussed in the Gold Wave Analysis above).
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AUSTRALIAN GOLD PRICE (EFT: ASX:GOLD)
CLOSING COMMENTS The present market conditions very much resembles a “wait and see” scenario. The longer markets typically stay in the one place, the more pressure builds for a substantial move in either direction. For me it is becoming increasingly harder to find positives. As for negative catalysts, take your pick! While a contrarian at heart, I can’t help but feel that investors are largely sitting on the sidelines for good reason. The markets to me resemble nothing more than a contrived and ugly mess. There is far too much outside intervention which, if history is a guide, never ends well. The more you try and push a market in the direction it doesn’t want to go, the more pronounced the move will be in the opposing direction. This is something our central bankers and government officials from around the world simply won’t accept.
Troy Schwensen Editor www.globalspeculator.com.auww.goldnerds.com.au
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DISCLAIMER © The Global Speculator
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This publication has been prepared from a wide variety of sources which the editor, to the best of his knowledge and belief, considers accurate. The editor does not warrant the accuracy of the information and forecasts contained in this publication. This information is provided for educational purposes and nothing written should be construed as a solicitation to buy and sell securities.
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