Gold Commentary - May 27, 2005

A Technical Commentary

Markets are pretty quiet at present, waiting for a number of "issues" to be resolved. These include:

1. In the immediate future, waiting to see how the French vote on the referendum on the EU Constitution to be held on Sunday, May 29. The reports are almost unanimous in predicting a no vote, the only caveat being the large "undecided" portion of the polls - up to 20%. In private, M Chirac is said to have already resigned himself to the French rejecting the Constitution - for the usual political reasons. They fear the loss of the "French way of life" and more to the point, they fear employment competition from Eastern Europe.
2. As an aside, can you imagine what the result would be if a referendum were held in the US or Australia on their respective Constitutions. Considering what the people in both nations have voted FOR in recent years, one could only expect a landslide in the negative.
3. There is also the continuing nervousness as the markets look all around to try to find the hedge fund or funds which have been mortally wounded by such items as the recent downgrading of the debt paper of GM and Ford. That one could pop open at any time, and June is the next period when the hedge funds are vulnerable to redemption demands from investors. Such periods come up four times a year.
4. Then there is the anticipation of what China will do with its currency. Will it stubbornly retain the peg to the US Dollar? Will it widen the Yuan's trading band around the US Dollar? Will it float the currency completely? And when will any or all of these events take place? Treasurer Snow was trying to hose down the Congress this week, claiming that the Chinese have now done "everything necessary" to float their currency.
5. Looking further ahead, there is a G8 Summit in Scotland later in June, and the FOMC meets again on June 29/30. In this context, it is interesting to note that the European Central Bank has held their interest rates stable for two years now at 2.0% while the Fed has tripled theirs - from 1.0% to 3.0% - in less than a year.

Spot future Gold hit its low in the current correction on Monday, May 23 when it closed at $US 416.90 - by the end of the week, it was up to $Us 419.80. Silver, which hit its correction lows in the mid $US 6.80s at the end of April, has fairly leaped this week from $US 6.95 to $US 7.31.

The Gold stocks are also interesting. The Aussie Gold stock index which we compile here at The Privateer hit its correction low shortly before Gold did. The XGO closed at 1504 on May 17. It has since been as high as 1615 (up 7.4%) before closing for the week on May 27 at 1597. In the US, the "Amex Gold Bug index or HUI" has risen from its correction low of 166.46 on May 16 (the equivalent of May 17 in Australia) to close on May 27 at a one month high of 186.71. That's up 12.2%.

We run several Gold charts on these pages, of course, including the one on this page, but here are the weekly charts of both spot future Gold and Silver both going back to the start of their bull markets in 2001.

Spot future Gold weekly - 20 and 40 week Moving Averages:

Spot future Silver weekly - 20 and 40 week Moving Averages:

In general terms, the charts are very similar. Both depict intact bull markets. The Gold bull began in April 2001, the Silver bull seven months later in November 2001. The silver high so far was set at the beginning of 2004, the Gold high at the end of 2004. Both charts have recently been challenging their more accelerated uptrend lines - although they are still well above the trendlines going back to the start of their respective bull markets. And finally, on both charts, the shorter-term (20 week) moving average (MA) remains - only just - above the longer-term (40 week) MA.

The differences are there too. The Silver chart, if for no other reason than the price differential between the two, is much more volatile than the Gold chart. Gold is still close to its uptrend line while Silver has bolted above both its uptrend line and its recent trading range this week. And while Gold remains below both its 20 and 40 week moving averages, Silver is now comfortably above its MAs.

Historically, Gold has always been the premier money metal, with Silver as its junior partner. The so-called "historical ratio" between the two is said to be 16:1, but this stems in large part for the fact that for the century up to 1934, the US Dollar was officially fixed and redeemable at $US 1.29 = one ounce of silver and $US 20.67 = one ounce of Gold. Do the "math" - that comes out to a "ratio" of 16.0233:1. The "ratio" is rooted in market lore, however. It is interesting to note that Gold peaked in January 1980 at $US 850 and Silver at $US 50 - that's 17:1.

On investment markets, especially since the severing of the US Dollar from silver in 1965 and from Gold in 1971, Silver has always been characterised as "poor man's Gold". Right now, the "ratio" between the Silver and Gold spot future price is 57.4:1. At the Gold bottom in April 2001, the ratio was 58.6:1 - it hasn't changed much in the intervening four years, has it?. And lest you think these ratios are historically out of whack, let us remind you that in June 1934, just before the Roosevelt Government nationalised silver, the silver price was $US 0.45 with a Gold price of $US 35.00. That's a ratio of 77.8:1.

But let's get back to the present. As you can see on the charts above, Silver is threatening to break out of its trading range - after having bounced off its accelerated uptrend line each week for the past month. In addition, the spot future price has bolted well above both MA's on the chart. Gold is still hovering just above its uptrend line and is still below both its (20 and 40 week) MAs. Here we have one potential "lead indicator" for an imminent upturn in the Gold price.

The other indicator is the recent recovery of Gold stocks, as documented above.

With all the undoubted manipulation which has long been and of course still is going on in the $US price of Gold (and Silver), the uptrends are still holding on both metals. It is clear that technical support for both Gold and Silver are formidable at recent levels, and this week the support for Silver kicked in and the $US price jumped 5.2%. Will Gold follow suit? Not if the Bush Administration, the Treasury, and the Fed can help it. But such has been the case throughout the $US Gold - and Silver - bull markets which are now entering their fifth years. There's not much going on right now, but the next month or so could be VERY interesting.