Jean Temkin
25 August 2008
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Johannesburg — PRICES are dictated by supply and demand. Until the middle of last week, the value of platinum had dropped to a 10-month low and gold to a nine-month low. Then came a sudden switch from supply to demand for precious metals.
The initial reason for the supply situation - rising metals sales - was a falling oil price.
As was the case since the beginning of the year until two months ago, precious metals were used as hedges against the oil price. Gold is also used as a hedge against a falling dollar. While the oil price was falling, the dollar was rising against the euro, but those exchange rates have now switched trends. At the same time, the rand has gained against the dollar.
Last week, gold, platinum and the euro-dollar bounced sharply up from oversold positions pushing through moving averages on their overbought/oversold plottings. This is a positive signal, but as it deals only with the ultra short term, a longer-term look is needed before plunging into precious metal investments.
I have used the weekly plotting of gold and platinum, which formed triangles in the past 12 months, rising sharply and falling more sharply. Gold's triangle, the thinner plotting, was initially steeper than that of platinum, but the fall was less pronounced. Gold's bottom was reached, followed by a slight rally, before dipping back to that bottom. As gold is an indicator of oil-dollar hedging I've used a moving average convergence/divergence (MACD) plotting. The MACD is well below the horizontal zero line and at its lowest weekly point since 1999. The MACD needs to cross its moving average to give a reliable buy signal.
Platinum touched the bottom edge of the triangle before pulling up slightly. Again we don't yet have any kind of reliable buy signal for platinum. The plottings are telling us to keep an extremely close watch on the situation, and be ready to plunge in when reliable buy signals appear. The Cycle Trends' forward plottings of platinum, gold, and oil are upwards as is the euro to the dollar.
A snapshot of the market given by Share Friend Executive's sector view heat map has altered dramatically. A week earlier the map gave a thumbs down view of mining, but last week a proceed with caution view. Winners towards the end of last week were precious metal shares, but other mining, including Billiton, display kicks-ups though none has confirmed buy signals. But the JSE resources index nudged up, showing it again in favour.
The third white candle on the weekly JSE overall plotting, needed to confirm the market had seen the bottom of the present cycle appear. But it was a midget, not the needed tall candle, leaving us in doubt. The overall's MACD plotting pushed sharply up through its moving average, signalling a buying position; the Cycle Trends future plotting is gently up.
Affecting oil supply, the Georgia hostilities are blamed for the oil price rising. The rise has been slight, but there is a possible upcount in Brent crude to above $140, a plus signal for Sasol with its longer-term count to R512. In steel, if ArcMittal rises to R190, we will have a new count to about R242.
Banking, life and short-term insurance indices lost ground and are likely to lose more.
Expecting earnings to be 65%-75% higher for the year, Aveng shot into an overbought position, but it is likely to drift sideways for a while. While residential building is on hold, mass-housing developer Seakay confirmed a new bull trend. WBHO has a count to about R136; if it moves to R131, we'll have a new count to about R168.
The general retail index has begun to dip, but losses may be slight. In industrial transport, after good results Grindrod has given a buy signal.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis. She has interests in Sasol and Grindrod.
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