Trader’s Call 2002-03-12

A quote from our Market Strategy of 25th Feb on SA Golds :

“We are looking for a soft week or two for SA Golds and cycle evidence makes us probably more aggressive buyers after the first week of March than now, subject to the market itself showing the way sooner. Those who frantically bought golds on the 22nd Feb after they had sold their favourites earlier last week, may have to be patient and may still regret not buying lower. ”

Well the pullback /dip is underway and now is another opportunity to decide whether the gold bull is over as many sceptics say – or are we right with our call that this bull is but young? Either way, it is really very difficult emotionally, to sell again if you were a buyer recently when the $Gold price broke 8.80. In some cases stops decided on with sincere intent (but in many cases too tightly) – are being triggered now that HAR and GFI are coming back a bit. Tonight as I write, the gold price is at 9.90 and GFI and HAR are at critical supports where they trade on the Nasdaq in New York. However, hourly patterns suggest clever buying underway – with scope for consolidation and renewed upward acceleration very soon now.

What does one do? That should have been decided when buying – not now! That is called sticking to your trading plan. The plan we suggested is to run two levels of stops – a tight one for half and a wider one for the other half of any holding, particularly now when the risk is there that everyone wakes up one morning to find the Gold price at 2 or 8.

I am still clear though – this gold bull is but young. It is a case of deciding how much risk to take on current holdings and where to buy most aggressively if you have cash. Our answer to that stays as before – buy some here, more on dips and more after a base or upward break corroborates. Holders should know their two (or three !) stop levels – one tight e.g.. 13% below entry price, and the next below a key technical level which will adjust each day according to a predetermined volatility test e.g. the 14 day low while volatility is reasonable and say a 3 day low when the volatility increases (for example the day you are observing action, movement that day exceeds the three day distance of high to low and do various samples to compare the volatility profile of the last three days to the previous three days).

Our reading for those interested in rather being market readers – is that the US$ is in the early stages of a trend reversal to weaker relative to the Euro and the SwF (watch SwF 1.65 and 1.72 for direction confirmation) and we read the behavioural signatures of pullback since the most recent attempt to breach 0 resistance on the Gold price at a time when the US $ was firm against most currencies – as a pause before the next approach of 0 – which will be followed by a breakout to 2 and above. We see the breakout imminent – almost certainly this month and can be any time even though we mention the 14th-15th and 27th-28th as key cycle dates. Momentum parameters suggest it will need a week or more of action below 6 to indicate a substantial pause or failure of the bull underway.

In addition we see the Rand having probed key support levels with little fundamental to suggest a reversal of the major one year (and longer) trend to weaker. Investors still don’t want to invest in SA and all the hot air about speculators at a commission of enquiry only make the foreigners more perplexed why our government can’t see what is needed.

We believe that the fundamentals for SA do not encourage foreign investment until some or all of the following change – and that would need a massive about turn for government policy: 1) We need to reward productivity and that needs affirmative imports of skills. We need affirmative education not affirmative appointments. 2) We need to make the tax environment more entrepreneur friendly – e.g. tax holidays and a flat income tax or a higher consumption tax. Capital gains and witchhunts among the wealthy just demotivate risk takers. 3) a more entrepreneur friendly labour environment 4) less tap dancing about Rule of Law issues when dealing with Zimbabwe and our local opposition parties. At the moment the world perceives us as another African basket case in the making. 5)Spend on reducing crime – instead of a super duper President’s jet ( reduce the whole gravy train and get tough on crime). 6) Show the world we have confidence in ourselves by virtually scrapping exchange control. And don’t make asses of ourselves by trying to find a scapegoat for those who sold the Rand last year and the year before and the year before and the year before. The Rand fell because those who invest, know a trend when they see one. Until policies change – and/or there is 65% technical reversal evidence, we assume the Rand will pause now, then head weaker.

So when the Rand gets its next set of selling shocks, it will add another set of boosters to gold shares which have hardly reacted at all to the Rand’s roughly 5% rally relative to the Euro in the last few days. In fact already this afternoon there has been a reversal signal to up. Previously we pointed out the importance of action above Eurozar 10.15 and US$ZAR 11.65. Now that it has happened after a dip to 9.40 and 10.80 respectively, the fun could really be on quite soon as the breakout first corrects ( pulls back e.g.1/3) then perhaps does a rocket. Watch the buying of resources today Friday – even golds will see some cautious nibbling, notwithstanding a softer $Gold price in New York. You know what I think if you are planning to be a buyer of GFI and HAR and others ? Buy some now.

Or to put it another way, we stay with our advice to accumulate golds in dips such as the current one and in any more dipping in coming days. Key level updates which will show acceleration potential when penetrated for GFI are at R94.40 and R96.60 – buy at not more than R97.50. We have mentioned targets before and they haven’t changed much. On the downside I’d be a bit concerned on any action half an hour before a daily close below R86.10 and would probably dump half holdings near there or wait for a subsequent bounce to get out and then wait for a new buy set-up. On balance though, there is lots of evidence that the bullies will be back very soon if the Rand or $Gold – or both play the game.

Levels for HAR are at R109.80 and R111.10 and the “concern level” (see discussion on GFI above ) at R95.90 – although of course the momentum signatures relative to range and cycle at that point would also be relevant.

Also note that the JSE All Gold Index has not even probed 2290 again ( mentioned in TC of 250202) – another bullish indicator, particularly at a time when some “technicians” were screaming that the Rand is headed stronger. Golds can be accumulated 2160 to 2520 – a bit higher than the 1970 to 2480 range we talked about on 25th February. I think there is scope for a little bit more selling i.e time for TC’s to be buying, if the gold price is kept around 0 for a few days and the Rand tap-dances a while. That scenario would offer better buys than the current 2416 on the index and could fit the 14th-15th cycle window admirably. Read what we said on 25th Feb about missing the boat, again though. If I am right – golds can still confound and perplex the masses who miss the boat.

Why am I so sure golds will run? Well in addition to micro tech and cycle evidence, the gold price and shares should firstly have headed much weaker when the currency dealers managed to hold the US$ up against the Euro in the last week of Feb – but golds headed stronger. Then the gold price and shares headed weaker as the US$ was sold in favour of the Euro and SwF in the last few days – especially this afternoon – another opposite of what “should” have happened – which makes traders smell a glint. Massive manipulation of the yellow metal price is an early warning of the next blast off to Jupiter.