As pointed out for the past few months, the US dollar Index (USD) has been on a corrective move upwards. At first this may sound like a bad thing for gold and gold stocks, but not really. The first important point to address is that all sectors will have their own trend, while correlations may hold. The price of gold (POG) is subject to fluctuations in the US dollar currency that it is pegged to, and supply and demand factors. Recently the HUI/USD indicated that gold had broken relations with a lock-step move to the US dollar. With the weakened link to the USD, it has been evident with the USD moving higher the past week while gold has managed to maintain its price above $360/ounce. How quickly we have all forgotten that the USD was around 110 and the HUI was at 155. This fact alone is suggestive that the "perceived and inherent risk" in the marketplace is the most important factor for gauging the price of gold. One thing a weaker US dollar translates to is other currencies being stronger. Canadian companies over the past decade have not even had to worry about productivity issues....the lower Canadian Loonie (the Canadian currency also has a Toonie, for its two dollar coin...the phrase "Moonie" would have been more appropriate as the queen is on the front and a polar bear on the back, hence the "Queen with a bear behind" literally) took care of that. Since the Canadian dollar rose rapidly from 64 cents to 72 cents, GoldCorps cost of removing gold from the ground rose from $67 to $100/ounce (other factors too, but this is the big slice of the pie). The earnings from Canadian gold companies have been lower despite a higher POG. Also the South African Rand played havoc with its gold producers, causing stocks like Adam Hamiltons phrasing of the "RoodePort Rocket" to lose fuel and come plummeting back to earth. The stronger USD right now should be viewed as a positive for PM stocks outside of the US domain, as their earnings will be better, and should yield a better share price. In the cycles of the USD and the HUI, the interesting observation of both having upcycles, with the HUI possibly being further ahead may make the casual observer scratching their head as to what is occurring here. As demand for gold tightens, a higher USD is irrelevant. A shortage of available gold and gold shares due to global investment demand will negate practically any rise the USD has if the demand is present. However, there is the flipside. When the USD does begin to slide, the POG will rise due its pegging, but other currencies will rise also. If the POG rises substantially against other currencies when examining their ratios, the downside would be negated due to demand for shares. The bull market of the 1990s was driven by greed. Greed is a powerful emotion and often associated with pigs....and we all know pigs get slaughtered. What is the basic emotional theme for a bull market in precious metals and their related shares.......FEAR!!!!!. Fear is the most powerful human emotion, period. Greed causes complacency and creates a sedated state of relaxation with the urge to make more money and throw even more chips on the table. With fear, one does not know what will happen...loss of a job, house, can we buy food, is the country going to be able to make old age security payments etc. etc. Fear causes paralysis and triggers the primal "Fight or Flight" emotion in the human mind. The total amount of gold on the planet is values at around 1.39 trillion dollars with a $360/ounce gold price. Gold shares of all the companies globally are over $100 billion. With derivatives globally over $150 trillion, the US government on the hook for $44 trillion (54 trillion by 2008) etc. etc. it is easy to conceive how shortages of gold and gold shares could develop.
Would shortages cause the US government to confiscate gold.....NO, for the simple logic that China has allowed their people for the first time to own personal gold. IF the US were to try the 1930s style of confiscation, then they would be the true Communist country would they not? As previously discussed, the coming problems to our North American society will require a more socialist (Communism dressed up) role. I do not think the US would want to be deemed a lesser nation than a Communist regime, so the outright confiscation should not occur for that reasoning alone.
Currently there are numerous developing countries around the globe fighting boughts of hyperinflation and deflation. All hyperinflation leads to deflation at some point or the other. With ownership and gold and gold shares, it is the only sure chance of actually preserving ones net worth. The analysis this week has thrown in Gann Fan lines. I will not delve into the angles implied with each line. The lines go 1x1 for a 45o angle and 3x2, 1x2, 1x4 for upper lines above the 1x1. 2x3, 2x1, and 1x4 lines are presented below the 1x1 line. The Gann lines provide support and resistance depending upon the trend. If a price falls below a trendline, prices will consolidate at the next level below prior to advancing. Placing Gann Fans of lower degree within the trend aid in determining when a trend reversal will occur. The 1x2 and 2x1 lines should house most of the wave structures (shown in red on the Figures).
Analysis is presented on the US dollar Index, Gold BUGS Index (HUI) and S&P 500 Index. The two chart types present include
1) Daily charts showing Bollinger band (BB) patterns (21 MA in red, 34 in blue and 55 in green) and full stochastics with settings gauged to each index and 50, 200 day MA with Gann fans, and with MACD.
2) Elliott Wave analysis of shorter term counts (alternate counts shown in gray)
US Dollar Index
The first Figure shows the USD with Bollinger Bands (BB) and full stochastics set at 55,21,34. The index cash price is below the red downtrend line of the 55-day MA. The banding pattern is hard to decipher right now. Usually when the upper BB's consolidate together for an uptrend, they do so from the very start of the move. All three upper BB's here did not converge until they reached the top of the move thus far. There is not much if any upside left for the USD to move currently. The full stochastics indicate the USD index is still in an uptrend currently. Going short on this currency should be done with care, as it is not wise to go against the grain.. Figure 2 shows the 50 and 200 day moving averages with Gann fan lines, and MACD. The USD just passed above its 200 day MA. It will be difficult to advance beyond this level by any significant margin. The 1x2 Gann fan line of the higher degree and the 2x1 line of a lower degree Gann Fan intersect around October, suggestive that a decline in the USD index may occur around that time horizon. The 2x3 Gann fan line of the current wave up has been offering support/resistance for the current wave structure. It is expected the wave pattern will remain close to this line prior to completion of its move up. A break below the 2x1 line indicated on the chart would be a sign that the wave structure was complete. Indeed in Elliott terms it could be the first wave in a flat structure (3-3-5), but only time will tell. The MACD currently has the USD in an uptrend since a bottoming in mid-June. There is resistance against the longer-term sloping downtrend line.
Figure 1. Bollinger bands and full stochastics of the US dollar Index.
Figure 2. Moving averages, Gann fan lines, and MACD for the US dollar Index.
Figure 3 shows the current Elliott Wave pattern of the US dollar index. There are multiple ways to label this pattern currently, but this is what I have. An error was made in last week's chart from analysis of a ratio between two waves. Instead, the wave structure was part of a non-limiting triangle with a current final wave of the pattern occurring right now. The corrective wave is a triple combination, with a flat-x-non-limiting triangle-??. The upward target of the current wave is 100-102. The market will do what it may...it could be complete and head down. However, there is a lot to suggest the wave structure have awhile to go prior to completion of its pattern.
Figure 3. Elliott wave analysis of the US dollar Index.
AMEX Gold BUGS Index
Figure 4 shows the BB's and full stochastics set at 89,21,55. The BB pattern has the lower BB's set to form a ribbon-type pattern suggestive of more upside in the index. The upper BB's are tight, confirming the uptrend. The full stochastics longer term has formed an upward sloping channel. It is expected the crossover of the %K (faster moving line) and %D (slower moving line) will not occur until December 2003. Moving averages, Gann fan lines and MACD are shown in Figure 5. The 50 day MA is well above the 200 day MA confirming the bullish uptrend. The Gann fan lines of the larger degree are fully labeled. The lower degree Gann fan line only shows the 1x1 line. It is of interest to point out that the 2x3 lines for the Gann fans of higher and lower degree have provided significant support to the index. After a lengthy consolidation the 2x3 line of the larger degree, it is assumed the index will move above the 1x1 to touch the 3x2 line within the next phase of the advance, which lies around 260 currently.
Figure 4. Bollinger bands and full stochastics of the HUI.
Figure 5. Moving averages, Gann fan lines, and MACD for the HUI.
The current Elliott wave count I have satisfies more of the structural requirements and works well, since the move to 202 did not occur. The gray dot shows the prior start of the wave pattern. Replacement of the start of the current wave has the count in wave [i].3 currently. We can now expect a retracement of wave [2] to the three Fib areas shown on the right y-axis. 166 to 171 is the expected range for completion of wave [2]. Failure to meet this area minimally would reveal the market strength of one higher degree in the pattern. There is the distinct possibility that wave [i].3 is actually wave 3 completed since it is more extended in price than wave 1 by 161.8%. However, the time wave 1 took to complete was nearly 2 ½ months, while wave 3 so far has only been underway for one month. Due to extended waves by price action being extended in time also, and other indicators presented showing a top is months out, there is a high probability that wave 3 will not complete until some time in October, 2003. Wave 4 should be a sharp retacement of wave 3 since wave 2 had a relatively shallow retracement of wave 1. Waves 2 and 4 will generally alternate between one having a steep retracment and the other having a sideways motion. Elliott wave trending is very useful for gauging how much higher markets can go in relation to the structuring of the patterns. As the markets are dynamic and ever changing, so are the Elliott wave patterns we see so far.
Figure 6. Elliott wave analysis of the HUI.
S&P 500 Index
Bollinger bands and full stochastics with the setting of 55,21,34 are shown in Figure 7. The stochastics have had a sell signal issued well over one month ago, and the upper and lower BB's have now merged. When this occurs, there can be a 2-4 week sideways motion prior to a break in either direction. Given the bearish technicals for the S&P on the daily and weekly patterns a decline is expected, prior to another move upwards in December 2003 to February 2004 to commence. Gann fan lines, 50 and 200 day MA's, and MACD are shown in Figure 8. The 50 day average above the 200 day MA is bullish for the trend still (lets see how this holds up 4-6 months from now). The Gann fan lines show how there has been a drift from the 4x1 line to the 1x2 line thus far of the larger degree. The 1x2 line of the smaller Gann fan has intersected with the 1x2 line of the smaller fan, creating a triangle around the current wave up (see red lines). Currently, the 3x2 Gann fan line of the smaller fan is acting as resistance/support. A break below the smaller 1x2 fan line would be bearish at this juncture. The MACD is butting up against the longer-term downtrend line, which puts strain on any further advancement of the index.
Figure 7. Bollinger bands and full stochastics of the S&P 500 Index.
Figure 8. Moving averages, Gann fan lines, and MACD for the S&P 500.
Figure 9 shows the current Elliott wave count for the S&P 500 index. Slight changes were made on the placement of wave 2. I had some issues with the placement of internal labels that did not balance well. One problem with this count is the 0-2 trendline violates wave 3. Aside from that, there is good balance within this count. Currently the wave structure for the S&P 500 is minimally complete, with wave 5 having a terminal impulse pattern with an extended fifth wave. The alternate count, which has the same probability is that we completed wave [i] of [v] i.e. four more waves to go. A break of 970 to the downside would confirm the wave pattern was complete. We are within 1-3 weeks for the S&P pattern to break to the upside or downside.....most of the evidence is pointing to the downside. The S&P should correct above the lows placed in October 2002 by Dec/2003 to March 2004. After, a large rally is anticipated in the markets ( See update from August 10, 2003).
Figure 9. Elliott wave analysis of the S&P 500 Index.
Summary
The USD is currently in an uptrend, slightly passing its 200 day MA. The Elliott wave pattern places a likely high around 100 to 102, although downside is just as accurate a forcast. It is not expected for the USD index to start its decline until mid-October currently.
The HUI is still in a bullish uptrend, with the larger degree wave structure not completing until Dec 2003 at the earliest. The pattern could extend into early next year. Gann fan lines of different time frames suggest that higher prices within the trending lines are occurring. The MACD, BB's, and stochastics are all bullish, with the Elliott wave count showing that wave [i] of wave 3 is complete. The entire wave 3 structure is thought to be set to complete at some point in October-November, given the slope of wave [i].3.
The S&P could decline at any moment. The BB's are set now for a decline, with most other indicators having a bearish tone. Given the market strength, the S&P could stay at current levels for 1-3 more weeks. The index staying here past the end of September would be like walking on air.
That's it for this week. I will be trying to do analysis of the XOI and XNG for next week, and hopefully the 10 year treasuries. It has been nearly two months since I have looked at these indices.
