TECHNICALLY SOUND The following is an extract from the April 07 Issue of The Global Speculator sent to subscribers on the 4 th of May 2007. 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. 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 The Global Speculator 2
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 19/11/2001 0.18 49.46 272.90 Gold Performance Net Position 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. The Global Speculator 3
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 Global Speculator 4
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. 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 break resistance and manage to hold above this level. 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. For anyone interested I write a free newsletter on the precious metals market which you can sign up for at the website below. Troy Schwensen The Global Speculator 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 Warren 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. The Global Speculator 5