Gold: a special report

By Regina Meani, author

This special report on gold begins with an analysis of the Australian dollar against the US dollar. The Australian dollar has a close link to commodities because we are a resources-heavy country and when commodities rise, especially gold, the Australian dollar usually follows.

The unfortunate domino effect can be reflected in our gold miners, which may have somewhat deflated earnings. But it appears we may be entering a catch-up period for gold stocks and this report will highlight the largest ASX-listed gold company, Newcrest Mining.

1. Australian dollar versus US dollar
Beyond the naughties

Source: Regina Meani, Your Technical Analyst

In recent months there has been much speculation about the Australian dollar's relationship, not only with the US dollar but around the globe. Some have suggested it could become a world reserve currency in three to four years and that it could easily be closer to US$2 than US$1 and that fair value could be around US$1.70.

This is not out of line with my long-term chart for the Australian/US dollar. Two significant events occurred in the noughties decade (2000-2009), which some call the naughties because naughty things happened and not only in the financial world.

In 2003 the downward trend drawn from the 1970s was broken, which led to a rise towards parity, a place the A$ had not been for more than 20 years; and the 2008 plunge saw the A$ return to that trend line which acted as a springboard to resume its upward trend and move beyond parity to reach a key target.

In early 2011, when the A$ jumped past parity with the US dollar, the action confirmed a major milestone: the break in a 97-year bear trend.

Pushing higher, the A$ reached US$1.10, a long-held target, and combined with the size of its rise, divergent momentum and the significance of the trend break, the A$ halted and went into a reactionary phase that is continuing to exert its influence over the currency.

As the phase has developed it has formed a broad triangle, which is likely to see more churning between $1.02 and $1.06 with broader parameters lying at $1.0165 and $1.0850.

Once the upper parameter is overcome, the upward path would be resumed with the A$ regaining the potential to head back to $1.10 and towards $1.25, and potentially much higher. The threat to this scenario would be if the reaction deepened on a fall below $1.01 with the increased risk of a fall beneath 90 cents, which may delay or endanger the trend resumption.

2. Gold price (Comex spot gold price in US dollars, per troy ounce)
Into the never never land

Source: Regina Meani, Your Technical Analyst

The long-term chart for gold has the ability to conjure up what some may suggest is fantasy as we look at the experience of the past and what it could mean for the future.

If you believe one of the concepts of technical analysis (what has gone before can be duplicated) then on the accompanying chart the pause in 1974-76 produced a rise of similar magnitude to its lead-in (h1 on the chart).

It may be suggested that what occurred between 1980 and 2001 was of much greater proportions, but its effect can still be the same. So if we measure its lead-in (h2) it implies that the gold price could have a lot further to run; indeed, momentum is now suggesting the price is at another half-way pause similar to the mid-1970s.

When the US-dollar gold price reached $1911 in September last year it look overbought, and encountered a parallel resistance line. From there the price entered a pullback phase that largely resembles that experienced in 2008, when it hit resistance and slid across the trend in a volatile movement.

As the current action progresses, the price has bounced and held internal support around $1525, churning up to tackle resistance around $1630-$1650, with a more important barrier at about $1680. Once cleared it would signal a return to the upswing and move towards the higher barriers at $1800 and, most importantly, around $1900.

However, while the indications are still mixed and the similarities to 2008 remain, there is the chance that the bounce and rally may falter and that the price may need to reconnect with its base trend line for a more secure return to the upward path.

This would be signalled on a fall through $1525 and would create the risk for a final move down within a range of roughly $200, but more likely limited to $1380-$1400. Even so, such a decline would not break the trend on the longer-term chart or alter gold's ability to fly significantly higher, which suggests that perhaps we should all be taking advantage of the current phase and any further gold price weakness.

3. Australian gold index
A repeat performance?

Source: Regina Meani, Your Technical Analyst

In a similar fashion to the gold price, the action on the Australian gold index from 2011 resembles 2008, but as momentum swings towards the positive it seems the index may have located a higher benchmark of support than in 2008, with a reversal phase potentially already in play.

The double turning point located at 4546-4549 in July this year may well prove to be secure, with the subsequent rally breaking resistance around 5250, propelling the index towards 5550-5600, where another pause may occur before higher barriers can be tackled between 6200 and 6400, then finally around 6900.

As with the first hurdle, the index may need to pause as each successive hurdle is approached before the upward path is fully resumed.

There remains some element of risk for the index and its constituents until the reversal phase is completed, and a drop below 5200 would be a warning sign and beneath 4785 a more negative signal.

4. Newcrest Mining
Barries to be overcome

Source: Regina Meani, Your Technical Analyst

Newcrest Mining is the largest ASX-listed gold producer and one of the top five gold mining companies globally by production, reserves and market capitalisation. The company has interests in six production provinces in four countries, with a focus on Australia, the Pacific region and Asia.

The share price formed a large base between 1988 and mid-2003, which empowered the shares to reach $40.27 in 2008. It gained a whopping 35 times its price from its lows in 1997.

An unstable top formed in reaction to such an over-extension and the price fell into a volatile decline, finding a turning point within a few months at $16.46. Rebounding quickly from a combination of support, the price retraced most of the lost ground to oscillate between $27.50 and $39.50 during 2009.

In the latter part of 2010 the price burst higher to produce a new peak at $43.47 in November, but the move saw a divergence in momentum and the upward draft was broken in early 2011; the price entered another decline not dissimilar to the 2008 experience, but showing less volatility.

In keeping with Newcrest's prominent position in the gold index, the price located a double turning point around $20.90 in July with the push up through $23.00 breaking the short-term downtrend. The price is encountering some resistance as it pushes into the $26-$28 range. Once clear, the shares would be on their way higher to test $30-$32, then $35 and potentially towards $47-$50, possibly significantly beyond.

Support during the current churning phase is around $25.50-$25.80 and then between $23.50 and $25, and more importantly around $21.40 because a drop below this level may endanger the resumption of the upward trend.

About the author

Regina Meani is a freelance consultant in market analysis and one of Australia's leading technical analysts. She is an authorised representative of stockbroker BBY.  Her company, Your Technical Analyst, provides private tutoring and larger seminars, training investors and traders in market psychology, CFDs and shares, and technical analysis.

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