Gold – too soon to Sell – Not too Late to buy the Dips

Of course they are right – the problem is to what degree does one take profits and how aggressively does one add? And how practical and usable is this advice? These are often the sounds of portfolio managers who have been caught napping and are hoping for a decent pullback so that they can buy at levels which can still be justified to the “value” calculators who are on their investment committees.

The fact is that golds have broken up and out of their long term ranges. Although at first blush it looks not easy to buy golds at current levels after they appear to have run so far already – trend evidence suggests that the gold bull is but young. If you have a firm view on the global picture and can assess targets, current prices relative to where they can go start to look attractive – once one does one’s homework with some what-if scenarios.

Technicians who use their behavioural measurement tools in conjunction with related indicators such as currencies and major market indices, are able to act with some conviction provided they read the trend for what it is and are not dissuaded from acting by their overbought/ oversold indicators.

My message, contrary to those who are saying sell – is the same as last week. This gold bull is but young. One doesn’t want to tap dance and rationalise and fiddle and hope for ideal buying levels. You buy the dips of 5%-25% from the peaks – to build useful buying averages – and although you will not get ideal levels, you don’t miss the boat. To buy at these levels that look high relative to two months ago, though – you have to form a view about where the boat is going.

Let’s have a look at Goldfields which has had the foresight not to hedge most of its earnings. The market is not stupid – it knows that something is brewing which is making the Japanese, Chinese and others buy gold. The market has bought Goldfields which has run better than any other serious gold share we have seen – and that includes the Australian and North American shares. Goldfields in both US$ terms and Rand terms, has broken up and away from a well established technical platform. Although heavily bought relative to 2 months ago, it shows medium term trend characteristics which suggest that once the current profit taking finishes ( a buying opportunity) – there is scope to double or more in US$ terms – and to run even higher in Rand terms. A weaker Rand and/or $Gold strength could be fuel.

Of course there are a lot of variables along the way. A loss of buying momentum would reduce the quality of the wave counts. Yet the current count does indicate the health of the trend – something that the consensus investment community seldom gives attention to. Yes, they mouth platitudes such as “The Trend is your Friend” – but few actually act according to what every trader knows: i.e. that a trend can go on a long time (as the downtrend of golds since 1981 shows).

We are not saying that one has to ignore profit and capital protection stops – but we are saying that the dips have to be bought while others wring their hands about how “expensive” golds are.

Our momentum and wave count indicators relative to cycles and US$ action – signal that the toboggan ride downhill for Wall Street accelerates in earnest this week (13th -15th highlighted). If this happens, most global industrials, financials and bonds can fall hard. Some resources will do well. Golds can outperform.

So we think it is still time to buy golds in the current pullback and consolidation. The next blastoff could be imminent and should probe the 9 or 0 area quite quickly if the $Gold price holds above 5.20 between now and next Friday.

Action back to 4.50 would cool some gold bulls for a while. Action below 4.50 would suggest more work needed to maintain trend health. Yet the combination of questions about the US$ and macro factors such as Japan’s banks in trouble – are encouraging clever money to accumulate the yellow metal – much to the consternation of those who want the US$ to remain the symbol of reserve wealth.

Have you noticed how well the $Gold price has done (buoyancy above 2 on a weekly close last week ) despite the attempts to push the Euro and SwF and JYen weaker?

For years, the Fed and US Treasury have clearly been co-operating with other central bankers to maintain the supremacy of the US$. It is quite funny to stand back a bit and notice that in the last few years, every time there is a 10 % move in the Gold price – eyebrows and passions ignite. If the yellow metal had been just another commodity, it should have been able to swing 40 and 50 % in price just as other commodities do!

The fact is that despite all the efforts to write off the yellow metal as a useless relic of bygone times, current emotions around gold underline yet again that it is the main challenge to the status of the US$ as an alternative store of value. The only asset without a corresponding liability – unless you are a bank and have leased out gold you still have to buy in. But that is a story for another time.

Think about it – it only needs a 33 1/3% gold price rise to make 0 again. Gold mines which are unhedged and have been working for years to reduce the costs of production will reap the benefits if the gold price does sustain its run.

Meanwhile China, Japan and the Middle East have shown that they have been quietly accumulating while the Western banks sell. Not good news for financial and social stability during the next decade. Planet earth can thank the US for relative global stability during the last 56 years. We are concerned about the US losing its dominance economically. But debts catch up when growth slows or goes negative. Just what the enemies of freedom want.

Those who don’t quite understand why golds offer “value” at current levels and on dips, will only know a rational explanation after the event – as facts emerge (much like the Enron example). We think that the answer is that US private and public debt is dependent on sustained US economic growth. With the rest of the world in recession – the US will also head into a negative growth phase. Money will leave the Wall Street and look for safer returns in Europe – even though Europe is also uninteresting.

To further fuel distrust of stocks and currencies – the whole world now questions the truth of claimed earnings as well as the sustainability of actual earnings of many of the top US companies. Do you remember what Watergate did to US confidence? The US like to think of themselves as the “good guys” – the example to the rest of the world about Integrity and Truth and Rule of Law and all that.

Those who in 2000- 2001 had to face the fact that Nasdaq earnings expectations were an illusion – are now very, very sensitive to questions about the reality of earnings beyond Enron. We suspect the world is in a transition phase, which will result in a new dynamics for the global financial structure

A Wall Street selloff in the current interest rate and global set-up would corroborate my counts – which call the prospect of the US$ falling at least 20 – 40% in the next two years against traditional safe haven currencies e.g. the SwF. Wouldn’t it be interesting if Japan starts cleaning up its bank balance sheets and begins to liquidate Wall Street Stocks and US Bonds and to sell the US$ and to buy more Euros and Sterling and Gold? Our counts show scope for the JYen back below 100 within a year! – contrary to popular belief.

Buy some US Eagles or KrugerRands – while at reasonable levels. If you like a really intense ride on gold shares, buy some call warrants or other calls on Goldfields and buy some calls on Harmony and Randgold and Afrikander Leases and Avgold . Goldfields and Harmony are almost unhedged and will still do especially well as global portfolio and hedge fund managers scrabble to get aboard. Most of these shares are set to dip a bit in the next few days. Buy some.

As I said in August 2001 already, when Miss Piggy rises, she does so with Grace and Alacrity and Persistence. She has to be wooed even if she is expensive.

This is the 21 year bull cycle for Gold we have been waiting for. When does one sell? At profit and capital protection levels and at targets. We discuss selling strategy and targets in TRADER’S CALLS and TURNING POINT at Then buy the dips when they come.

Also watch the S&P 500. Action in the next week or so below 1082 could signal that the next slide is underway – probably until early April on our cycle research – target 700 or below. Any bounce in the next couple of days to 1105- 1140 could be a great shorting opportunity and another opportunity for stock market investors wherever they are to implement a defensive strategy.


Those wishing to protect the value of their life savings need to think about their pension schemes and retirement annuities and life policy and unit trust investments. Where feasible, take active steps to switch both local and global value and growth equity funds – and linked life products – to offshore funds as a Rand hedge and to guaranteed funds and even better to offshore hedge funds – or even to money market funds, before the storm becomes fiercer. Favour resources (on dips) for JSE investments, especially golds. So called “Rand hedge ” financials and industrials will battle in the global selloff we believe is developing.

Our technical count system and cycle analysis shows IT’s and Media shares have another big leg down in coming months and will take more than a year from now to begin recovery, so don’t be fooled into thinking that the worst is over.

Consumer and fixed investment industrials will also be under big pressure in the next year or more.

After absorbing the implications of a scenario of the Rand falling another 60% ( like last year) in the next year or two, you can see the context of my repeated advice to make sure that where possible, to be invested offshore to protect against more Rand declines.

Those investors who sit tight and hope to ride out this still to mature bear, are risking being caught in a long wait for recovery. 2003 is a candidate for the cycle low but having regard to the length of the 72 year cycle which may be at work here – the falls and basing can easily take another two years before any real turnaround to up.

If we are reading the technical and fundamental evidence right, in many cases it is not too late to sell and it is time to get defensive. Except for some special situations and golds, it’s too soon to buy.

Investing defensively includes selling some shares likely to under-perform, to make cash – and selecting contra trend performers.