Gold is showing some promise, and to get started, lets just show this chart – Daily candles on gold, last 4 months:
Can anyone say equivalent triangle? Maybe I will repeat my performance of calling for a higher move again when the market will break down, but it seems highly unlikely this time. Why? Longer term time frames (1+ year) pretty much prints the lower component of this triangle as the bottom of the trend (1 year part is represented by the blue line), while the top represents a retracement from a wild overshoot. The lining on a linear chart isn’t perfect due to logarithmic effects (less mathematically inclined people might consider this base effects: 10% of 100 isn’t the same as 10% of 200), but you can find this pretty much anywhere anyhow, not my job to highlight it.
Trend and Momentum Analysis:
On the short term the trend appears longer ( = stronger) on the downside, but with the perspective of the last 5 years, the situation changes quite dramatically and the last line down looks more like a blip to be broken than anything else. Short term vs. long term? I’ll be with the central banks on this one and say “long”.
With this in mind, however, what is the play, and what are the things I will look for? Assuming a break higher, the longer it takes, the better. This comes from the 60-day bollinger bands severely contracting, and most notably the top one falling in quickly (arrow). This needs to reverse before any rally can resume in proper full force with momentum backing. When will this happen? After two weeks. How can I be so certain? The SMA (white thick line) is still falling, and will do so until price pushes significantly above the bottom of the white box. Remember, the direction of the SMA is simply governed by the last price included and the next price to be removed, nothing else. The box length is about two weeks (ending on December 23) and after that the SMA will tilt up. Furthermore, the top values will be removed so the bollinger bands will not contract significantly after the new year breaks. This two week time frame coincides with the crossing of the trend lines, so the longer we stay in this interval, the better!
Significant price levels:
What is the potential for an upwards break then? As I’ve mentioned earlier, the 1815 level (pre-CMA margin hike) will be crucial if we get a break to the upside, where we therefore have to climb the post-margin hike highs if we are to attack it. If that happens, a sequence of events which should seriously challenge every daily close up to and beyond the 1900+ double top seems likely. This will be a struggle however and I am not entirely confident that the triangle width rule (breakout price + direction of breakout x triangle width at start) will apply, given all the price action that will be required to be overcame. The triangle with at start, using the smaller triangle, was about 300 (1870-1575) which would punch price to 2000 +. I do not believe that this psychological level will be broken that easily, so I call for a January 2012 high of 1970. The upside to this analysis would be from the larger triangle which has a span of about 370 (1910-1540) and would cause price to challenge 2100. I could put this as the best level to pose serious resistance after the 2000 break. Call for pre-April 2012 high would be 2110.
And you’re profiting from this… how?
I can’t say this enough: Chow Tai Fook! Pricing at 33 P/E potentially? Luk Fook Holdings, which would be their closest comparable competitor, sits at a pretty nice 19.2 P/E! Given that, and that CTF has significant advantages in size, Chinese Tier 2-4 cities exposure, and gold trading operations (more in a separate research note), and the perfect timing (technicals, Chinese New Years). I estimate this to equal 25 P/E on forward earnings driven by gold price increase speculation and Chinese soft landing scenario. Highly volatile still, but I will mention this closer in the research note.
In the meantime, consider this chart of the last months’ performance of Zhaojin Mining:
5.5:1 on bull vs. bear closes, which is much better than gold itself! Sure, it’s trading near 29 P/E (wow!) but we’re not talking the absolute performance measurements here. The market is bullish on this company when it’s trading, so I assume the institutionals that have access to the early morning trading have vastly less faith in it. Sure, holding a P/E 29 with horrible liquidity (current ratio below 1, for example) probably isn’t too inspiring these days if you’re getting paid to place other people’s money… It’s capital structure, growth ability and earnings power does command a premium to Zijin Mining (lower LTd/Totald debt ratio, 29% vs 21% annual geometric turnover growth over 5 years, and 40% vs. 25% operating profit margin) but 113% – 28.9 / 13.6 – seems a little bit off. Multiplying the cross ratios between the companies of growth history and operating profit margin differences does account for the differences in valuation, and small benefits can be given thanks to dividend payout ratios, but be watchful of this one longer term. High risk, high reward, and assessing risks these days is pretty difficult.
Play it safe, play it quickly, bet in at open, close at afternoon if need be, and switch to long Zijin if things change materially in the candle counting perspective. And then invest the proceeds in Chow Tai Fook.
[Note: This is an edited post. I have altered the initially posted estimate of the P/E range for Chow Tai Fook and made initial changes to the discussion as it turns out I had horribly wrong numbers to back my quips up. Adjusted for now. Not materially important for the analysis above, but still pretty embarassing to fudge the numbers of the biggest IPO this year in HK…
Update: This discrepancy came from the forward P/E for 2013 which has been floating around and was dropped at 16 times previously at Bloomberg. Thanks for helping clarify this in later posts, BBG.]