"observation more than books and experience more than persons, are the prime educators" - Amos Bronson Alcott 1799-1888, American Educator, Social Reformer
We have 3 charts. First one is palladium; second the dollar and third Gold. These charts are slightly different from those that were sent out in the midweek update; they all contain 19 years worth of data.
We will first start by looking at each chart separately, then look at the relationships between the charts and finally end of with our long term conclusions.
Palladium was in channel formation from 1991-1997. As we have stated before the longer the channel formation the more explosive the upward movement. When it broke out of the channel the price was 140, about 3 ½ years later it traded as high as 1040 dollars. Since 2002 it has been undergoing a brutal correction. It corrected all the way back to 140 and the support line held. One of the best times to invest in a sector is when it is has been beaten down to death and the reasons just don't add up. Unless we stop manufacturing cars tomorrow, Palladium is always going to be needed. At current prices and taking inflation into consideration, palladium is trading 20-30% lower than it was trading in 1997.
It did break its main up trend line briefly in 2003, but as we stated before a brief penetration of the up trend line is normal many times. There is also a way to deal with this situation very effectively. When the main trend line is broken in a very long-term chart such as this, you then switch over to a different time frame (that's where multi time frame analysis comes in) and to determine whether you should stay in or bail out, but that's another topic.
The dollar was in a channel formation from 1991 to 1997, (It was possible to play the up and down moves in this channel formation using multi time frame analysis as these charts have a lot of data compressed in them). Technically the dollar started rallying from 1995, as the up trend line within the channel formation was never breached, unlike the previous attempts. The main stage however began in the 1997-1998 period and it continued to rally up to 2002. From 2001-2002, the dollar was doing nothing but topping and issuing strong signs that it was ready to start correcting. Now play close attention to this part. In about 2 years the dollar lost all the gains made in 7-8 years; now that is what you call a vicious correction. It only stands to reason that some sort of counter rally is to be expected. Look closely and you will notice that the dollar actually peaked in 2001 and was struggling to take out this high in 2002 without any success. From its peak in 2001 to its low in 2004, the dollar lost approx 31% of its value. Gold from its low in 2001 to its high in 2004 gained approx 72%; so investing in Gold bullion more than made up for your loss in purchasing power.
Notice to that the dollar has not taken out its 1986 high of 128 and is therefore technically still in a downtrend pattern. I did not put the downtrend line here, but it was included in the mid week update.
We have just broken the long term down trend line. Note that Gold initially broke its long term down trend line in 2000; it was unable to stay above it and ended up testing the lows once more before mounting a very nice rally. There is a strong possibility that the dollar could do something similar and just maybe even test the major support Zone at 80 (if it did this, it would most likely do so on some positive divergence, i.e. lower price and higher macds or RSI, or Stochastics or a combo of all three). It is for this reason that we expect this trade to be very volatile in the initial stages.
Gold bullion has been in an up trend for 3 ½ years now, without a serious correction. The main up trend line has not been breached and is a zone that currently provides incredibly strong support. If we were to break through this support zone for more than a few weeks, then the top of the channel (not drawn in) around 300-320 provides a fortress of strength.
Now let's tie in all these relationships.
Both palladium and the dollar started to rally from around the middle of 1992; Palladium unlike the dollar was able to maintain it's up trend line. The dollar kept battling within the channel to find a direction. The moves in the channel were by no means small; a range of 80-96 is not a small movement. It appears that Palladium led the dollar in terms of strength; its move was a precursor to what the dollar would do in the future.
Moving on: The real true break out for palladium came in 1997; once again it led the dollar, which only really broke out in 1999 (from 1997-1999 it was forming another channel). However once the dollar really broke out in 1999, palladium went ballistic with the dollar; from 260 it powered of all the way to 1040 and the dollar from 96 went all the way to 122.
This is what we found surprising and only discovered when we were looking at very long term charts.
Palladium seems to work in tandem with the dollar for the most part, which means it works in the opposite direction to what Gold is doing. This can be clearly illustrated not only in the break out phase of palladium but also in the corrective phase. Throughout the palladium bull Gold was essentially correcting and when palladium broke out in 1997, the bottom dropped out for Gold. If history is any indication of what the future might hold, then it appears that once again Palladium has led the break out. Its downtrend was broken in the middle of 2003, while the dollar is still trying to break out of its down trend line.
If the pattern is to be repeated then the dollar will attempt a rally now (since these are long term charts do not expect something overnight), which will initially fail, while palladium keeps slowly moving up. Look at the periods from the middle of 1992 to the 1997; while palladium slowly kept going higher, the dollar was bouncing up and down in a wide range. These up and down movements were pretty huge; the top of the range was 98 and the bottom of the range 80 or so. This is not something small and in terms of futures represents thousands and thousands of dollars in profits or losses depending on which side of the trade you are on. Those performing a simple currency exchange (changing euros, Oz dollars, Swiss francs etc) would also feel some pain initially. We need to watch palladium closely as it seems to be a lead indicator to what the dollar is going to be doing in the future. If palladium is pointing to a stronger dollar, the following conclusions can be drawn
1) That Palladium is seeing a stronger world economy (meaning that even if the US has anemic growth, the world could take up this slack. Since Palladium is mainly used in the auto industry, we are only concerned with this aspect when we talk about the world economies.)
2) That Palladium will lead the way slowly at first, with the dollar rallying and correcting till it finds its way as it did in 1997.
3) There were times when palladium and Gold traded in tandem, while the dollar was correcting. In 1993, both Gold and palladium rallied and finally Gold broke down, while palladium carried rallying on. From 1989 to 1991 both palladium and Gold corrected in sync, then they parted ways as palladium started putting in a base formation, while gold carried on correcting. The same thing is happening now; from 2003 Palladium has been rallying with Gold. If history is to repeat itself then at some point in time they will have to part ways. Since Gold bullion is up approx 71% from its low, it has a better chance of correcting than palladium.
As you can see the data we are looking at is extremely complex and almost provides for contradictory scenarios. Right now we are not assuming much but just reading what the charts are saying, later on we will finish of with our assumptions.
Let's zoom in a bit and examine the range bound movement in the dollar from 1991 to 1997. First of all we don't think we will enter such a long phase this time but examining this situation does provide some clues for the future.
The dollar started to mount a rally in 1991 after putting in a low around 80-82 and this rally was rather strong; it took the dollar all the way to 98. After that the dollar started to brutally correct and put in a new low just below 80. Now we could be entering such a phase, the dollar has mounted its first rally and might even rally a bit higher, it could then correct and put in a new low just as it did back in middle of 1992 before taking off again. This means that Gold will initially pull back but then as the dollar corrects hard, mount a pretty sizeable rally. Then the bottom would most likely drop out for Gold Bullion and it would brutally correct. It would not be inconceivable to see a 50% pull back which would mean a correction to the 375 ranges or lower. The dollar then would start a new long term up trend journey just as it did in 1995. Palladium would really start to accelerate its move up, once the dollar was in full swing as was the case in 1999.
We have taken so much time to look at these relationships, because they are extremely complex ones that have occurred over large periods of time. The most complicated part is how deciding how to position ourselves for this situation; knowing that there are going to be periods of extreme volatility in between.
The information above seems to confirm our previous bullish case for Palladium. However it has now provided us with a larger view, which means that technically we could pull back all the way to 160-170 and still be in a major up trend (A situation we would not be looking forward to but must be open to).
It also means that very soon it will pay for overseas subscribers to switch to Dollars or move some of their money into dollar denominated assets. US citizens and residents you already own the dollar so, what palladium and the dollar charts could be indicating is that carrying debt could be more expensive.
Gold, a very tricky situation; palladium can go up with Gold, but to date the Dollar and Gold have not been able to trade in the same direction. So as far as Gold bullion is concerned, it could mount a significant rally if the dollar were to repeat its performance from the middle of 1991 to the middle of 1992. This is where the dollar after mounting a nice rally brutally corrected and took out its previous lows. Gold did not react, as one would expect to such a powerful down move; the dollar corrected from 98 to 79 (19 points) and Gold only jumped up from 350-380 (a mere 30 dollars). Since the situation is a lot graver now than then, Gold should react in a more violent way if the dollar were to correct in such a manner. The 425-430 ranges have been a source of serious resistance for gold since 1990, if we break past that and hold, the next real resistance only appears at 500.
This is one of the most complicated and most difficult situation we have had to ever analyze. The clearest pattern is that of Palladium and the Dollar. As far as Palladium goes it has started a new major trend change and the dollar is in the process of beginning one.
Gold on the other hand is already well into its trend change and such has the potential to correct to its main trend line and even dip briefly below it. So in terms of risk to reward based on current prices, Palladium is a far better play than Gold Bullion. We will update our outlook on this metal in future updates, however there will be some lag time as we have to cater to subscribers first.
Now let's look at a chart of Palladium that dates back to 1978
This chart provides additional information as you can see the Macds are at the most oversold point ever in the history of this contract. If you go to the first chart you will notice that the Volume has been very strong in this up move that started in 2003 (from the 140-150 price ranges)
All these charts seem to confirm that palladium appears to be a very good long-term investment. The only problem with palladium is that one has to know when to bail out as the final stages of the move occur very rapidly and end just as fast. We will use our indicators to guide you out when the time is right.
Out of the three charts, Palladium is the most oversold, followed by the Dollar; Gold bullion is the least oversold (we are talking about Gold bullion and not Gold shares many of which are already very oversold)
"The average man does not know what to do with this life, yet wants another one which will last forever" - Anatole France 1844-1924, French Writer