Jean Temkin
25 March 2008
column
Johannesburg — DOOMSAYERS are likening this market volatility to the Wall Street Crash of 1929 and there are indeed some similarities. Like now, debt was one of the main causes of the Great Depression. In the "roaring" 1920s US consumers and businesses relied on cheap credit to buy goods. Consumers spent on cars and furniture while businesses borrowed for capital investment in order to increase production. During this consumer boom the Dow Jones industrial average (DJI) increased fivefold, rising to a high of 381,17 on September 3 1929, tempting speculators to borrow funds with which to buy shares. Brokers were lending investors more than two-thirds of the face value of stocks.
After reaching the high, the DJI became extremely volatile. From September 3 to October 24 1929, the DJI lost 17%, only to recover half its losses before the next swipe robbed it of 13%. By 1930 the index was down to 248,48. Volatility continued throughout the 1930s. In 1931 the DJI lost 52,7% and in 1933 32,8%, but grabbed back 66,7% in 1933 and 38,5% in 1935. Only in 1954 did the DJI reach its pre-1929 levels.
SA suffered the Great Depression as, with one exception, its resources and commodities were less needed. The blow was softened to some extent by investors seeking the safe haven offered by gold.
Now, although central banks have reduced their stocks, they still have plenty of gold, but not nearly as much as they used to -- and perhaps not as much as they think. Britain, which swapped half of its gold for cash about nine years ago, has again sold more than half of what was left. Between 1999 and 2002 it sold 395 ton s. But worse was to come. Late last year it was suggested by Patrick Hosking, writing for The Times under the headline "All that glisters may not be gold", that the gold stored by the Bank of England may not meet the "good delivery" standards of the London Bullion Market Association. Hosking was following up a story in Metal Bullion that claimed that some of the 320 ton s stashed away in the bank's vaults might have been adulterated with base metal and therefore not be pure gold. While the gold carries assay marks, there are no assay certificates for this gold and the gold bars have begun to show cracks and fissures. US gold sources say that they have similar doubts about their country's gold, which has not been examined by an external auditor since 1950.
For a picture of the current situation of the DJI, I have begun a chart in September 2005 when the dollar gold price broke the $450 resistance, its highest for 17 years. Initially there was some correlation between the movements in the gold price and DJI. By May 2006 the gold price had increased 62% and the DJI 12%. Next came an 18% fall-back in gold, a rise, and then another fall. From September 2006 until August, the gold price rose in a sluggish manner, frequently dipping into the lower section of the speed lines, while the DJI improved significantly, pushing from the lower to the upper section of the speed lines. The start of the strong upward move in gold coincided with a substantial dip, and then recovery, in the DJI. After reaching the record of 14101,77 in October, the DJI began to fall, but until last week gold continued to rise.
The JSE overall index took a 5% dip last week as resources, which had been the engine driving the index almost back to its October high, substantially lost ground. The financial industrials index held steady but the resources index fell 9,44% and the gold price lost 8,45%. Using Cycle Trends future plotting to peer ahead, the overall may lose a little more before recovering; financial industrials move sideways; resources lose a little more before a sideways move; gold to continue down for a few days before making a recovery; platinum to drift slightly downwards; Brent crude to lose a little more before making up the loss; and the rand to lose a little more before generally gaining against the dollar.
Among last week's few winners, Metair gained well on encouraging prospects for OEM production volumes. Avusa improved slightly on shareholder agreement of its unbundling resolutions. MTN moved better on good results and encouraging prospects. Afgri shot to an overbought position for a yet-unknown reason. Under a cautionary, GijimaAst moved to an overbought position. Altron gave a hesitant buy signal as it moved swiftly upwards in oversold territory.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis.
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