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Yola Edwards

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The metal of the future

Yola Edwards


TORONTO (GlobeinvestorGOLD) - From 1870-1900, all major currencies, other than China, switched to a gold standard, thus linking their currencies to gold. However, the July 1944 Bretton Woods Agreement intended to promote international monetary exchange stability among independent nations and under the terms of the agreement the Gold Exchange Standard was formed and set "the basis of post-war monetary system with the U.S. dollar to maintain a $35=1 oz (a;; figures U.S.) gold conversion rate. Other currencies were fixed, but adjustable, in terms of the U.S. dollar." The agreement was fully adopted by 1958. In 1968 the U.S. Congress repealed the requirement for a gold reserve to back the U.S. currency and a two-tier market was created with a floating gold rate for private market trading and a fixed rate (held at $35 an ounce) for central banks. However, the system collapsed when on August 15, 1971 the United States suspended its currency convertibility from dollars to gold. On March 19, 1973 most major countries adopted the floating rate system and on November 13, 1973 the two-tier market was formally abandoned, and the rest, as they say, is history.

The thirty-four year gold chart below indicates that although gold prices spiked and initially doubled, it wasn't until 1976 when, after breaking out from a triple bottom low of about $105.63, gold skyrocketed vertically higher, this time reaching an intra-year high of $850 in 1980. Then, just as swiftly, the price turned and dove retracing two-thirds of its gains by 1982. Over the following 14 years bullion traced out a symmetrical triangle, which is a pause in the major trend. Although gold prices resumed the previous downtrend in 1996, forming a bullish saucer bottom, which saw the end of the decline base at about $255, which was about $100 above the triangle's suggested downside target. The shallowness of the decline led to an upside breakout at about $389 in 2003. A successful 2004 retest of the lows completed the pattern and gold raced off once again without much pause to form the consolidation platform that usually accompanies this type of pattern, suggesting very positive momentum.

34-year gold chart

However, the recent meteoric rise to the Friday Jan. 20 multi-year high and intra-day high of $568.50 (U.S.) is overdone in the short-term. Friday's sharply higher open and subsequent lower close has created a bearish reversal Harami pattern, which suggests the market is "losing its breath." Also the moving average convergence/divergence oscillator (MACD) is in overbought territory and appears to be rolling over. A close below $542 (U.S.) may signal a further retreat to the 41-day MA at about $530, however further sell offs to test the bullish open window support at $522.70 and possibly the lower daily oversold Bollinger band at $490 (U.S.), would also not be a surprise.

February Gold Contract

However, any pullbacks should be viewed as buying opportunities as the saucer pattern's technical measurement suggests a $650 target over the next 12 to 24 months.

Investors who don't have room in their home or safety deposit box to store the physical commodity or who don't have the risk tolerance to invest in a gold futures contract might be interested in purchasing a gold exchange traded fund, such as Streettracks Gold Trust, which is backed by gold bullion. According to the prospectus, the fund's gold is mainly held by HSBC Bank USA and by sub-custodians such as JPMorgan Chase &Co. and Bank of Nova Scotia. Investors who purchase the ETF's are subject to a 0.4 per cent fee for the fund's expenses. As the ETF trades in US dollars on the NYSE, investors should factor in currency risk. The ETF trades at one-tenth the value of gold bullion and as such its technical picture closely mirrors bullion.

Streettracks Gold ETF [GLD]

The January 20 reversal from an overbought level placed the stock's daily candlestick deeply into the previous session's trading range thus creating a dark cloud cover candlestick, while the weekly chart has also staged a bearish Harami pattern. First support should be found in the open window gap area, which also currently corresponds to the 10-week MA, from $51.72 -$52.10, thus offering a potential buying opportunity. A break of that point may see prices fall back to stronger support at the 20-week MA and daily lower oversold Bollinger band at $49.05, offering an additional buying opportunity. When the Bollinger Bands are stretched as they are currently there is usually a period of consolidation, so it shouldn't surprise anyone. However, a $490 gold level may strike fear in investors. Any time that happens investors may wish to become contrarians.

While oil, gold, silver and copper are commodity plays that quickly come to mind, consider yet another - titanium, as it will likely be the metal of the future.

Titanium is twice as strong as steel, but half the weight. It is corrosion-resistant, non-toxic, biologically inert, non-magnetic, biocompatible, and durable in extreme environments, making it an excellent material for a variety of non-traditional applications. It's used in aerospace, the automotive industry, and the medical and dental fields as prosthetics - titanium is completely inert to human body fluids, making it ideal for medical replacement structures such as hip and knee implants. Dental implants and pacemakers are also made with it. However, 93 per cent of titanium's use is in the oxide form found in the pigment industry in paints as well as in paper, plastics, inks, golf clubs, sun screen, coatings on glasses, cosmetics, and skin care products. It also has cancer-fighting properties.

Titanium producers cite the growing Chinese demand as "fuelling a resource deficit for the first time in years." Thus investors may wish to consider adding titanium stock to their portfolios. One that I like is Titanium Metals Corporation (known as "Timet"), which trades on the New York Stock Exchange under the symbol TIE. On January 13 the company announced an increase in its authorized common stock to 200 million, up from 90 million, and a 2-for-1 stock split in the form of a stock dividend for shareholders of record on February 6, 2006, to be distributed on February 16.

Titanium Metals Corporation

The share price has broken below the 10 and 20-day MA's as is it retreats from an overbought condition. The daily MACD is issuing a sell signal thus consolidation of its recent gains may continue until the share price reaches the oversold lower Bollinger band at about $63, where it would offer a potential buying opportunity. It appears that the stock is in a corrective fourth wave of a five wave Elliot Wave advance. Once the correction is over it appears the stock's technical target extends to $97, attainable over the next year.

Technical charts indicate that investors should take advantage of short-term corrections in the commodity markets.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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