The Chartist

Hello all at the iii-community

Gold has been displaying some interesting behaviour over the past month and a half, ever since the GATA meeting in Durban. For a long time, the gold price was mainly bearish, with very low volatility, except when something really substantial happened to send the gold price sharply higher - as with the Washington Accord and when Placer Dome 17 months ago said they were ending forward sales and buying back forward positions. And then the spikes lasted not very long.

Now we find that gold ran up to $290, on actually very little news, if the GATA event is excluded, as the main stream commentators will have it. That too did not hold, but ever since then gold has held to a floor above $270 and have made a succession of forays to the upper $270's. More on this later, but it shows more promise than for a long time past.

Gold price. London PM fix. Last = $274,0 (26-06-2001)

Master line M is the resistance line of the extended wedge shaped pattern that developed following the steep spike in the gold price that occurred in September and October 1999 when the Washington Accord was announced - the agreement among European central banks to restrict their gold sales and leasing of gold.

A-C is a shallow bear channel, with A-C derived from M, as usual. X-Z is a set of steeply rising support lines, with Y-Z possibly defining the new bull channel following the break from the large descending wedge.

Scenario 1: Gold has broken from the wedge and just failed to give a goodbye kiss on line M - rebounding off line Z to begin a new rally. A break above line B takes place and is the signal that either line Y or line A has become the medium term target. Bullish.

Scenario 2: Gold fails to extend the bull trend, breaks below channel Y-Z and falls back into the wedge. Bearish, for the medium to longer term.

Preference: Examination of the wedge shows that gold has again broken with the typical narrowing formation, which is known to require 5 legs to complete normally. The break then takes place either at the end of leg 5, or shortly after starting on leg 6 - without even coming close to completing the new sixth leg with a move to the opposite boundary.

Here we see that the gold price - as it has done before - completed six legs, broke briefly lower for a second time and then rallied into leg 7, which led into the break above line M to leave the wedge.

The attempted - and nearly successful - goodbye kiss on M is not an uncommon event after a break from a major pattern and, in this case, is bullish for as long as the gold price remains above line M.

The bullish Scenario 1 is therefore selected, with perhaps the more conservative caveat that the gold price should remain within channel Y-Z for the Scenario to hold. A new rebound off support at line Z before the resistance at line B can be breached is possible.

JSE Gold Index with turnover in rand. Daily close. Last = 1238 (26-06-2001)

As usual, the upper half of the chart shows the recent history of the daily close, while the lower half is the dPdV analysis. Blue bars are the MACD of the turnover in rand, while the red bars are the price MACD.

When the MACD is above the base line, it indicates a rising trend, in price or turnover, as the case might be. When the MACD is below the base line, this indicates falling prices and/or declining turnover.

Master line M is the support line of the first part of the bull market that started out of the low in November last year. Channel X-Y is the steeper derivative of M, defining the new gradient of the bull market after it began to pick up speed late in March.

X-M is of course a megaphone formation, a chart pattern that is typically associated with strong trends and increased volatility.

Relevant points on the dPdV chart are:

A: The Gold Index declined into its November bottom on relatively lower turnover, with a surge in turnover (blue bars rising above the base line) even before the final bottom was in place. This indicated fresh demand taking advantage of a buyers market. Gold made a low at $264 in late October and was improving gradually to $265,50 by late November and the optimists were taking advantage of the pessimists.

When gold moved higher late in November to reach $274 in early December, gold shares also improved, initially still on higher turnover as disillusioned holders sold out, but soon turnover dropped away as sellers retreated from the market again. Gold was volatile but holding well into January and the low turnover shows that market activity was quiet.

B: Demand improved into the new year, despite a gold price that declined back into the lower $260's, and the Gold Index even held its level despite the weaker gold price..

C: Then some profit taking developed in February (blue bars rising above base line again while prices begin to slide) with the gold price breaking below $260 to reach $256. This profit taking was in line with widespread market advice that gold shares were for trading, not for holding.

D: When the gold price rallied above $260 again, going into March, and even briefly reached above $270, prices of gold shares jumped, but so did the turnover. This was most likely again a matter of playing the market over the short term, rather than buying and holding. The blue bars at D show two associated peaks - the first indicative of strong demand as gold started its rally and the second associated with profit taking as it became evident by mid March the gold rally was not holding. Yet, despite the gold price dipping all the way to $256 again, the Gold Index held above its recent highs. It may well be that strong hands were taking up the supply from the short term traders and thus maintaining a good floor under the gold mining sector.

E: When the gold price moved off the $256 level in April to begin a more controlled and sustained rise, prices of gold shares as reflected in the Index rose substantially - as is to be expected - but they did so on little increase in turnover compared to the preceding slack period. This shows that sellers were now less keen to get out of the market, which could be interpreted that traders were becoming more circumspect and less eager to take profit on small moves. If so, this was a significant change in market sentiment.

F: It was only in May, with the rally to above $290 subsequent to the GATA meeting, that the steep rise in prices of gold mining stocks brought sellers into the market in some quantity. As the gold price failed to hold $290, selling intensified and prices fell steeply again - yet, as before, holding above recent intermediate highs to indicate that the floor under the market had shifted upwards, which could imply good demand from buyers who were intending to hold the stock for the longer term, as well as traders keen to get back into the market again. The main point being improved competition for the relatively few shares coming onto the market despite the drop in price.

G: Early in June the gold rice started to improve again and, by mid June, when the trend was better established, prices ranged upwards again. Turnover started to pick up - thus showing increased selling into demand - which may well be some stale trading positions that were held over after the May high now coming onto the market.

Scenario 1: The new bull market is sustained. The Index moves higher within channel X-Y, with turnover falling away again as sellers retreat from the market. Reduced supply has buyers scrambling to get stock and prices rise further to take the Index to the top of channel X-Y - and of megaphone X-M - again. Bullish.

Scenario 2: Failure to extend the rising trend in the face of sustained profit taking is soon followed by a break below support at line Y to reach line M again. Bearish.

Discussion: Obviously, the determining factor in the selection between the two Scenarios is the gold price. If gold continues to move higher within its new bull channel (channel Y-Z, shown in the top analysis, then Scenario 1 will develop for the gold index. A fall off in turnover will offer the first indication that sellers are retreating from the market and this requires the gold price to at least hold above say $270, and preferably above $272 - its recent floor.

The question whether this will in fact happen, could perhaps be explained in terms which people who grew up on farms will understand. Firstly, the increased volatility in the gold market and activity around option expiry on Comex indicate an improvement in sustained demand for gold - as repeatedly stated by Bill Murphy, Chairman of GATA, in his comments on the market.

Now it is logical to assume that if there are parties out there who intends to acquire a quite substantial holding of bullion, that they would prefer to do so at $273 rather than at $293. The problem is that they have to push on the price in order to get physical gold coming onto the market - sold by those who have to contain the gold price at all costs. The initial jump to above $293 must have brought an increased amount of gold out of the cracks. It also resulted in the selling of a large number of futures contracts and options - many of these at around $275. Sellers of these options and contracts that are still open - Goldman Sachs being one of them - now have to defend this price level since it could prove a little embarrassing if gold should move up to say $290 again and the holders of the options and contracts ask for physical delivery.

While Comex and its futures market can be used to control the market to some degree, it also requires at least enough gold to satisfy physical demand, else gold spikes above $278 and has to be beaten down again - calling for more physical gold. Which is just what the real large buyers of gold have wanted - and which they are perhaps engineering.

Farm people know that when one milks a cow by hand, one occasionally have to "pump" the udder a little in order to get the milk flowing freely again. Recent intra-day moves in the gold price - to just below $280 followed by an easy and quick decline back to $273 - might be just exactly that: someone is "pumping' the gold market to get the supply of bullion onto the market flowing freely again, allowing them to buy gold in some quantity at below $280 and not inviting a lot of outside competition as will happen when gold screams up to $290.

If this deduction is valid and the "pumping" continues, a day will come when the large and consistent buyers believe they have almost enough gold and that it is time to break the price higher. A combination of depleting supplies of fresh bullion with which to keep the price under control and increasing all-round demand would then be sufficient to break the $290 and $300 barriers and get the whole market moving.

Until that happens - if the reasoning is correct - the gold price is likely to remain range-bound. Prices of gold shares should also fluctuate as gold changes short term trend - but probably do so still with a rising floor as demand chases a decline in supply.

Preference:

Scenario 1 is preferred. The analysis strongly suggests we are in the beginning of a long term bull market in gold and gold shares. (Cross fingers!!)

Happy trading!