introduction - global speculator · further weakness in the months of may and june 07. whilst it is...

Volume 2, Issue 4, 3 May 2007

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www.globalspeculator.com.au
INTRODUCTION The month of April 07 has seen further falls in the US dollar which initially saw the Gold price surge upwards towards the US$700 an ounce mark. The XAU Index followed suit before running into familiar resistance in the 145-150 region. Since then we have seen Gold fail to breach the US$700 an ounce mark despite continued weakness in the US dollar. The price has subsequently dropped back down towards the US$670 region to regroup. This has been a frustrating month for Gold Investors/Traders as Gold has failed to achieve what so many anticipated would be a strong surge on dollar weakness. You can pick up on this disappointment in many of the recent articles that have been published on Gold with many anticipating further weakness in the months of May and June 07. Whilst it is difficult not to share in the recent pessimism in the Gold sector’s performance, I take heart in the fact that the level of enthusiasm has dramatically come off the boil. In fact I get a rather strong sense of déjà vu. This 2006/07 consolidation period reminds me a lot of the 2002/03 period when I distinctly remember feeling a similar sense of frustration right about the time things started to turn around, catching many by surprise.

Introduction XAU Gold Ratio The North American Silver Index (NASI) The TSX Gold Index The Australian Producers Index The Australian Theoretical Price of Gold Update Closing Comments Disclaimer
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Volume 1, Issue 4, 5 June 2006© The Global Speculator 1



XAU (2002/03 versus 2006/07)

A look at the chart of the XAU above highlights the two respective consolidation periods of 2002/03 and 2006/07. You will notice the 2002/03 consolidation commenced from a peak made in May 2002 and eventually ended in March 2003 (Green Vertical line). A look at the 2006/07 consolidation shows a peak made in May 2006 with a “potential” end to the consolidation at the low made during the sharp correction we experienced in March 2007 (Green Vertical line). If you look at the XAU/Gold ratio section of the chart you can see that in April 2003 (Red Circle) the ratio rallied but ran into strong resistance which saw it retrace sharply in the later stages of April (Very frustrating at the time given the Gold price was rising). If we have a look at the corresponding period in April 2007 (Red Circle), we can see a similar rally in the ratio that ran into stiff resistance at about the 0.215 level (Corresponding with the 145 – 150 resistance for the XAU) before pulling back over the last couple of weeks in April. In my opinion it is far too early to write off the months of May and June 2007 based solely on the recent




weakness. Both charts above demonstrate good support for the Gold price in the US$665 – US$670 region and good support for the XAU in the region of 130 – 133. As I type this, the upward trend for the Gold price remains firmly intact as is the consolidation pattern for the XAU which is approaching the apex of a consolidation triangle. This usually indicates an imminent strong move in either direction. If you have a look at the top section of the XAU chart you can see that the 14 day RSI is presently trending higher (Bullish in its implications) in a similar fashion to that of the consolidation in 2002/03, which resulted in a strong break to the upside.

XAU GOLD RATIO

Key Dates XAU/Gold XAU

XAU Performance

Gold Price

Gold Performance

Net Position

19/11/2001 0.18 49.46 272.90

28/05/2002 0.27 88.65 79.24% 325.50 19.27% 59.96%

26/07/2002 0.18 55.73 -37.13% 303.30 -6.82% -30.31%

08/12/2003 0.28 112.21 101.35% 406.60 34.06% 67.29%

13/05/2005 0.19 78.99 -29.61% 420.70 3.47% -33.07%

31/01/2006 0.27 154.19 95.20% 570.70 35.65% 59.55%

13/03/2007 0.20 128.55 -16.63% 650.08 14.04% -30.66%

Current (03/05/07) 0.21 139.92 8.84% 672.30 3.30% 5.54%

The month of April 07 has seen the XAU rally as high as 148 before running into heavy resistance (Fully expected). This has since seen the XAU correct all the way back down to as low as 136.27, not far from the solid support which exists at 130-133. We can see that since our “tentative” low made in March 2007, the Gold shares have still managed to outperform the Gold price all be it to a much lesser extent than the 3-1 leverage we were experiencing earlier in April. There is no question that the precious metals sector has deteriorated over recent weeks. At this stage of the game I am still not convinced that the damage done over the short term is enough to warrant a change in the intermediate term outlook for the sector. With intermediate support levels for both the Gold price and the XAU presently unchallenged, one gets the feeling it may be a little premature just yet, to write the precious metals sector off for the months of May and June 2007.

OUTLOOK

The two short term scenarios as I see it over the coming weeks: Scenario 1: The support levels for both the Gold price and the XAU hold over the next few days or weeks before we start to see the precious metals shares continue to outperform the metal to a point which sees a successful break of both the US$700 mark and the strong resistance in the 145-150 range for the XAU. I continue to support this scenario despite recent weakness. Scenario 2: The support level of 130 - 133 is challenged and broken which could see the XAU fall rapidly towards the next support level of 115 and a XAU/Gold ratio which may challenge the previous low levels in this bull market of 0.18 – 0.19. This would obviously extend the consolidation further. Given the recent performance of the precious metals sector this still remains a valid risk.




Scenario 3: The precious metals market gets caught up in a broad commodity sell off and/or prolonged correction in the stock market, resulting in the XAU falling all the way down to either support at 115 or in a worse case scenario the long term support line at around 95. I continue to see this scenario as unlikely at the present time but given the volatility of world markets, it would be ignorant to dismiss the risk completely. Intermediate Term Outlook: Over the intermediate term my next target for the XAU is 165 -170 (Close to the previous high) consistent with the measurement of the present Reverse Head and Shoulder pattern (Assuming the neckline at 145 is definitively broken). After a brief consolidation at this level we could then see a more extensive rally that takes us to 230 over the latter half of 2007 or early 2008, depending on how long it takes this consolidation to run its course.

NORTH AMERICAN SILVER INDEX (NASI)




The Silver index continued to rally during the month and made a new high just prior to the recent weakness. This has seen a pull back to the previous resistance which is now support at 7,500. A look at the Comparative Relative strength to the Silver price shows the shares are not underperforming the silver price as they did during the last pullback. A look at the 14 day RSI also shows a positive trend which is also bullish in its implications.

OUTLOOK The two short term scenarios as I see it over the coming weeks: Scenario 1: Support at 7,300 - 7,500 will be tested but will hold firm and the Silver Index will rally higher over the coming months. I presently support this scenario. Scenario 2: If the Gold and Silver price were to get caught up in the sharp fall of the other commodity prices and/or a prolonged sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 4,300. Whilst the risks should be considered, I don’t support this scenario at the present time. Intermediate Term Outlook: Over the longer term my next target for the NASI is around the 11,000 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.




THE TSX GOLD INDEX

TSX Gold Index The TSX Gold Index continues its consolidation and is presently challenging support levels in the 290-300 range. The Relative Strength Comparative is trending lower which is bearish in its implications but has hit a support line which has held since May 2006.

OUTLOOK The two short term scenarios as I see it over the coming weeks:




Scenario 1: The TSX Gold Index continues to consolidate within the Triangle with support holding in the 290-300 range. This is the scenario that I am leaning towards. Scenario 2: If the Gold and Silver prices get caught up in a sharp fall with the other commodity prices or a prolonged sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back towards the long term support line at around 190. I do not support this scenario at the present time. Intermediate Term Outlook: Over the longer term my next target for the TSX Gold index is around the 500 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.

AUSTRALIAN PRODUCERS INDEX (API)




During the month of April 07, the Australian Gold Producers index has broken through the resistance at 4,300. The Relative strength comparative (RSC) with the Australian Gold price continues to trend higher in the short term which is bullish in its implications. Much like the North American Silver Index, there is also an intermediate term downward sloping trend line in the RSC which has been in place since November 2005. The clean break through this trend line is also bullish in its implications. OUTLOOK The two short term scenarios as I see it over the coming weeks: Scenario 1: The API may test the old resistance at 4,300 (Now support) in the short term before more than likely continuing to trend higher. I support this scenario. Scenario 2: If the Gold price fails to hold support in the US$665 – US$670 range we may see a pullback to either the 150 day Moving Average at 4,100 or the previous consolidation support line of about 3,900. Scenario 3: If the Gold and Silver prices get caught up in a sharp fall with the other commodity prices or a sharp sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 2,800. This seems unlikely at the present time. Intermediate Term Outlook: Over the intermediate term my next target for the API is around 5,200 (Close to previous highs) consistent with the measurement of the Reverse Head and Shoulder formation. I have a longer term target of 6,500 towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.

AUSTRALIAN THEORETICAL PRICE OF GOLD UPDATE

Date

10 Year BB Interest

Rates Official CPI

M3 Aggregate

Money Supply

Rate of Australian

M3 Change

Gold Production Av Annual

Increase (1.73%)

Australian Theoretical Gold Price

Actual Australian Gold Price

Actual as a % of

Theoretical

Jul-06 5.84 749.8 0.3480% 0.14% 2,422.82 834.00 34.42%

Aug-06 5.67 759.9 1.3470% 0.14% 2,451.97 810.00 33.03%

Sep-06 5.51 3.90 768.5 1.1317% 0.14% 2,476.18 807.00 32.59%

Oct-06 5.66 777.7 1.1971% 0.14% 2,502.26 781.00 31.21%

Nov-06 5.59 784.4 0.8615% 0.14% 2,520.21 809.90 32.14%

Dec-06 5.89 3.30 802.5 2.3075% 0.14% 2,574.73 804.50 31.25%

Jan-07 5.94 802.9 0.0498% 0.14% 2,572.30 827.00 32.15%

Feb-07 5.69 815.0 1.5070% 0.14% 2,607.35 852.00 32.68%

Mar 07 5.41 2.40 824.6 1.1779% 0.14% 2,634.31 818.00 31.05%




The month of March 07 has seen a steady increase in the supply of M3 at a rate of 1.1779% (14% annualized). March 07 year on year inflation came in at a much improved 2.4%, despite the sea of liquidity that has been pumped into the economy. I have included a graph below that shows the relationship between M3 growth, CPI, Official Interest rates and the Current Account Deficit (CAD). If you look at the first 10 years from 1990 to 2000 you see a typical relationship with a strong correlation between money supply growth, CPI, the CAD and official interest rates. An increase in money supply brought about by lower interest rates typically led to higher CPI and a worsening CAD. This would generally be met with higher interest rates which would then lead to a contraction in monetary inflation consequently leading to lower CPI and an improvement in the CAD.

-2

0

2

4

6

8

10

12

14

16

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

M3CPIOfficial Interest RatesCAD

Source: Reserve Bank of Australia Statistics Now when you look at this chart past 2000 you start to see some interesting changes. The first thing you will notice is a huge increase in M3 growth over the past 6 years (Averaging 11.23%) with a typical positive correlation with the CAD which has ballooned to nearly 6% of GDP (Considerably higher than in any time during the 1990’s). When we look at the CPI and interest rates we start to see that this is where the typical relationship between all these components ends. Despite a flood of M3, inflation as measured by the CPI index remains incredibly flat. As a result of these historically low CPI numbers, interest rates also remain historically low which is serving to sustain these high levels of monetary inflation. With the CPI figures creating the “illusion” of no inflation, foreign investors remain confident in investing in Australia. The Australian dollar has been a beneficiary of this, despite a CAD of nearly 6% of GDP (And rising). In the past this would have typically seen a deterioration in the dollar as foreigners would have been reluctant to invest in Australia, putting upward pressure on interest rates, thus serving to correct these imbalances. With people’s confidence in the financial system remaining high, the actual price of Gold in Australian dollars is just over 31% of its Monetary Inflation Adjusted theoretical value.




AUSTRALIAN GOLD BULLION (ASX:GOLD – 1/10 OF AN OUNCE)




CLOSING COMMENTS The month of April 07 has seen yet another attempt and failure by the XAU to break the strong resistance that exists at 145 – 150. On the bright side we have seen the North American Silver index and the Australian Producers index break resistance and manage to hold above these levels. From a fundamental point of view, the one factor I can’t seem to get past these days is the fact that many Gold mining companies are struggling with increasing costs. Whilst the Gold price may look healthy in nominal terms, on an inflation adjusted basis, it is not nearly as high as it ought to be. It would seem this view is supported by the fact that World Gold production in 2006 declined. This is not something you would expect to see if the Gold price was trading at a fair and reasonable price. We have recently seen two major Gold mining companies in Barrick and Lihir Gold announce that they have already or are in the process of eliminating their forward sales agreements. This suggests to me that both are very optimistic on the long term prospects for the Gold price which is something they won’t get an argument from me over. I just wish more of the Australian producers would wise up and follow suit.

Troy Schwensen

DISCLAIMER 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.


introduction - global speculator · further weakness in the months of may and june 07. whilst it is...

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