Clsa Gold & Silver - 27 February 2012

ASIA

Price ActionAsian technical research

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Laurence Balanco, CMT [email protected] (61) 285714253

Tiara Fontanilla (63) 28604011

27 February 2012

Asia Technical analysis

www.clsa.com

A look at regional and global technical trendsGold: Set for new all-time highs

A break above the 8 November 2011 peak of $1,802.93 would put gold back into a confirmed uptrend and open the way for a run at the all-time high at $1,921.15 and most likely new highs.

Another interesting observation is gold’s move in other currency terms. In Euro and Yen terms gold broke above short-term downtrend resistance drawn from the 2011 peak in January. So far in February we have seen Gold break above downtrend resistance in Swiss Franc and Canadian dollar terms with Gold in Australian dollar terms on the cusp of breaking out. This price action suggests that gold’s current rally is a genuine one.

Hi-Ho Silver away Silver is on the cusp of breaking out of a double bottom basing pattern

and downtrend resistance drawn from the April 2011 peak. A break above $35.36 would trigger the bullish implication of the double bottom pattern which supports a minimum upside target around $48, just below the April 2011 peak. In Elliott wave terms we can project a potential ultimate upside target of $60. Buy a break above $35.36.

Australia: Looking under the hood Year to date performance sees the MSCI Australia (in US dollar terms)

close to the bottom of the performance table of the MSCI Asia Pacific ex Japan constituents. However with the ASX200 testing the 4,315-4,417 resistance zone, hope is building for a sustained advance back to the April 2011 highs and beyond.

The most compelling price action is seen in the ASX200 Industrial sector with the absolute index breaking out of a more than two-year-old downtrend channel. Three stock standout from a technical perspective; Leighton Holdings (LEI AU) SEEK LTD (SEK AU) and Toll Holdings (TOL AU).

Another noticeable sector displaying an improving technical profile is the ASX200 Consumer Discretionary sector. David Jones (DJS AU) and Harvey Norman (HVN AU) are presented as potential base breakout candidates.

Silver: Set to breakout

All charts priced as at 24 February

Sources for all charts: Bloomberg, Updata, CLSA Asia-Pacific Markets

Prepared for: ThomsonReuters

Price Action

27 February 2012 page 2

ASIA

Gold: Set for new all-time highs We were expecting a deeper correction in gold early this year back towards the $1,400-1,450 area before the long-term bull trend resumes. The precious metal got as low as $1,530 on 29 December 2011, a retest of long-term trendline support drawn off the October 2008 lows, before staging a recovery rally. This rally has now taken price action back above the 50-day MA as well as short-term downtrend resistance drawn off the September 2011 high of $1,921.15. A break above the 8 November 2011 peak of $1,802.93 would put gold back into a confirmed uptrend and open the way for a run at the all-time high at $1,921.15 and most likely new highs. Gold: Set for a run at the all-time high

A break above the 8 November 2011 peak of

$1,802.93 would put gold back into a confirmed

uptrend

The choppy down-up-down (a-b-c) corrective structure supports our view that gold’s primary uptrend remains intact. As such we continue to recommend accumulating gold during corrections back towards the 200-day MA.

The down-up-down corrective phase marks a 4th wave correction of the five wave advance that has been unfolding from January 2007 low. A move back above the 8 November 2011 peak of $1,802.93 would most likely confirm that wave 5 is unfolding from the December 2011 low. Wave 5’s typically related to a Fibonacci ratio of 0.62x or 1x the size of wave 1. In this case we have two potential upside targets for the move off the December 2011 low of:

$2,142 – where the advance off the December 2011 lows is approximately equal to 0.62x wave 1 in percentage terms (January 2007 – March 2008 advance.

$2,648 – where the advance off the December 2011 lows is approximately equal to wave 1 in percentage terms (January 2007 – March 2008 advance.

If the wave structure and accompanying technical measures are compatible with a high when Gold reaches either of these areas, we’ll discuss the potential for an end to wave 5. If they are not compatible, then there will remain greater bullish potential as we are well aware that commodity bull markets have a history of ending with spectacular spikes.

Gold’s rebound off long-term trend support is now back above the 50-day MA

Wave 5 typically equals 0.62x or 1x wave 1. In this

case we have an upside target zone between $2,142

and $2,648

We continue to recommend accumulating gold during corrections back towards

the 200-day MA


Price Action


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Gold: Set for a run at the all-time high

Wave 5 targets are seen between $2,142 and

$2,648

Another fascinating observation is gold’s move in other currency terms. In Euro and Yen terms gold broke above short-term downtrend resistance drawn from the 2011 peak in January. So far in February we have seen Gold break above downtrend resistance in Swiss Franc and Canadian dollar terms with Gold in Australian dollar terms on the cusp of breaking out. This commonality for gold in multi-currency terms suggests that the current rally is a genuine one which sets the precious metal up for a move to all-time highs. Gold in multi-currency terms: Supportive of further gains

Gold breaking above short-term downtrend resistance drawn from the 2011 peak

in multi-currency terms

Gold in Euro terms

Gold in Yen terms

Gold in Franc terms

Gold inC$ terms

Gold in A$ terms


Price Action


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Interestingly, relative to Silver gold has started to roll-over after outperforming Silver by some 76% since April 2011. The relative ratio, after tagging downtrend resistance drawn off the September 2008 peak, has now dropped back below the 50-day MA and trendline support drawn off the April 2011 low. We suspect that this ratio is in the early stages of the resumption of the long-term downtrend. We’re looking for a return to the 41.55-44.59 area (50-62% retracement level of the 2011 advance) over the next six to eight weeks. As such we’d prefer to be long Silver over Gold in the coming weeks. Gold vs Silver: Rolling over

Zooming down to the spot Silver daily chart we note that price action is on the cusp of breaking out of a double bottom basing pattern and downtrend resistance drawn from the April 2011 peak. A break above $35.36 would trigger the bullish implication of the double bottom pattern which supports a minimum upside target around $48, just below the April 2011 peak. In Elliott wave terms we can project a potential ultimate upside target of $60 where the advance of the December 2011 low would match the October 2008 – December 2009 advance. Buy a break above $35.36.

Silver on the cusp of a major breakout

Gold/Silver ratio starting to roll-over

Prefer to be long silver over gold in the coming weeks

A break above $35.36 would trigger a bullish double

bottom pattern

BUY Silver on a break above $35.36


Price Action


ASIA

Australia: Looking under the hood Year to date performance sees the MSCI Australia (in US dollar terms) close to the bottom of the performance table of the MSCI Asia Pacific ex Japan constituents. MSCI Asia Pacific ex-Japan country relative performance

Year-to-date Indonesia, Malaysia, New Zealand

and Australia have underperformed the MSCI

Asia Pacific ex Japan index

However, with this week’s rally the ASX200 is approaching its trading range highs (between 4,315 and 4,417) that have been in place since mid-August 2011 has investors holding out for a sustained advance back to the April 2011 highs and beyond. But, it must be recognized that at least three previous rally attempts since August 2011 that have failed in this approximate price range, this is the fourth attempt. Whether this rally persists or fails will be largely determined by the performance of the two heavyweight sectors in Financials and Materials which account for roughly 64% of the ASX200. ASX200 testing overhead resistance again

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Year-to-date relative performance (US dollar terms)

ASX200 approaching 4,315-4,417 overhead resistance


Price Action


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Analysing the price action of the ASX 200 Financial index in absolute terms and relative terms (versus ASX200) we note that the absolute chart has been drifting across the well-defined downtrend channel which has developed off the April 2010 peak of 5,047. It would take a break above the October 2011 peak of 4,266 to improve the outlook for the sector. The relative chart displays a similar picture, one dominated by a clear downtrend channel, but here it’s worth noting that the relative price action has started to roll-over again dictating an underweight stance. ASX200 Financials, relative to ASX200 and 13wk relative momentum

Onto the Materials sector we see a similarly weak profile with price action in a clear downtrend from the April 2011 high. The recent failure at resistance provided by the 40-week MA and the October 2011 high reinforces this bearish trend and warns of a potential retest of the 10,400 support zone. A break below this level would open the door for further weakness towards next support at the 8,902-9,252 area. In relative terms the index has backed off double top resistance and is in a clear downtrend ASX200 Materials, relative to ASX200 and 13wk relative

In absolute and relative terms the ASX200 Financial

index remains in a clear downtrend

The materials sector looks set to retest the Sep/Dec 2011

lows


Price Action


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It’s worth noting that a number of base metals reflect a similar bearish profile. As well as Iron ore.

Commodities downtrend

LME Aluminium LME Nickel

LME Zinc

China import Iron Ore fines 62%


Price Action


ASIA

Focusing in on Copper (HG1-381.80c) we note that the metal has made an impressive 62% retracement of the 34% decline that took place last year, and is currently addressing resistance provided by the declining 40-week MA as well as price resistance in the 380-400c range. Looking back at the price history, one might suggest a wide trading range environment such as took place for most of 2006, and 2007 into 2008. A similar anticipated range currently could be defined between 380-400 resistance and 300-320c support. As such, we would recommend trading the range – selling above 380c and buying below 320c. Any penetration of either should guide the next major trending direction for copper. Copper ranger (weekly chart)

It’s worth noting that the two heavyweight stocks in the sector, namely BHP Billiton (BHP AU – last $36.35) and Rio Tinto (RIO AU 0 $67.92) are also trapped in a trading range. BHP has recent rolled over below resistance provided by the upper boundary of its range at $39/40 and looks set to test support at $33/34. While Rio has failed below $70/71 resistance and is working its way lower towards next chart support at $58/59.

Big-cap miners

Copper at best looks range bound between 380-400 and

300-320c

Rio Tinto (RIO AU)

BHP Billiton (BHP AU)


Price Action


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PanAust (PNA AU) looks like a trading sell as the stock has formed a bearish price/momentum divergence with its daily RSI indicator failing to confirm the 10 Feb high of $3.84. This sign of non-confirmation warns that the uptrend is mature and vulnerable to a correction. A break below short-term support at $3.41 would add further technical evidence that the trend has turned from up to down. Such a move would most likely lead to a test of next chart support at $2.90-3.00. PanAust downside risk

With the two major ASX200 sectors looking benign we have to dig a little deeper to find some positive relative and absolute price action. The most compelling price action is seen in the ASX200 Industrial sector with the absolute index breaking out of a more than two-year-old downtrend channel. Next chart resistance is at 3,875 and the 4,158. The other impressive technical feature is the relative’s charts breakout from a more than two-year-old trading range. This trading range can support an upside target of 0.96, another 10% outperformance. ASX200 Industrial, relative to ASX200 and 13wk relative

Trading sell on PanAust

ASX200 industrials breakout of a more than two-year-old

downtrend


Price Action


ASIA

Three stock standout from a technical perspective; Leighton Holdings (LEI AU) SEEK LTD (SEK AU) and Toll Holdings (TOL AU). Leighton’s recent move above $22.65-23.30 in early February completed a six-month-old base formation. The next objective for the stock is to close the gap created on 14 April at $28.18. Additionally it’s worth noting that the six month old basing pattern supports an upside target zone of $30.73-32.54, the amplitude of the basing pattern projected higher from the breakout zone.

Leighton Holdings: Base breakout

SEEK is another buy candidate as the stock has just broken out of a more than five-month-old basing pattern. This breakout supports an ultimate upside target of $8.20.

SEEK: Surging

SEEK’s recent breakout targets $8.30

Leighton’s breakout from a six-month-old basing pattern supports an upside target of

$30-32.


Price Action


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The daily chart of Toll Holdings highlights price action breaking out of a more than two year downtrend channel and a five-month-old basing pattern. This basing pattern supports an upside target of $6.90-7.00.

Toll Holdings: Turning the corner

Another noticeable sector displaying an improving technical profile is the consumer discretionary sector. As the weekly chart below shows the sector has broken back above its 40-week MA and downtrend resistance drawn from the April 2011 highs. The index now sits on the cusp of breaking above its October 2011 highs. Such a move would project an upside target of 1,522. In relative terms the sector has broken above downtrend resistance and its November 2011 peak.

ASX200 Industrial, relative to ASX200 and 13wk relative

Toll heading to $7.00

The consumer discretionary sector is on the cusp of

breakout out of a basing pattern


Price Action


ASIA

David Jones (DJS AU) finds itself in a similar position with the stock sitting just below resistance provided by the upper boundary of it basing pattern at $2.71. A break above this cited resistance zone would open the door for a test of next resistance at the $3.57 area, the October 2011 peak. Another technical feature worth noting is the bullish price momentum divergence which formed at the January lows. This sign of non-confirmation between price and the daily momentum indicator suggests that the downtrend is mature and vulnerable to a correction.

David Jones: Signs of stability

Harvey Norman (HVN AU) has finally found some support at the 2009 lows around $1.77-1.80. However, to confirm that an important low is in place the stock would need to break above $2.32 resistance. Such a move would trigger the bullish implication of the double bottom pattern which would support an upside target of $3.05 David Jones: Signs of stability

David Jones stabilising below $2.71 resistance

A break above $2.32 would trigger an important basing pattern for Harvey Norman


Price Action


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Key to CLSA investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded. CLSA changed the methodology by which it derives its investment rankings on 1 January 2012. The stocks covered in this report are subject to the revised methodology. We have made no changes to the methodologies through which analysts derive price targets - our views on intrinsic values and appropriate price targets are unchanged by this revised methodology. For further details of our new investment ranking methodology, please refer to our website.

©2012 CLSA Asia-Pacific Markets (“CLSA”). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/ communication. The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research report and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this website, please contact [email protected] or (852) 2600 8111. If you require disclosure information on previous dates, please contact [email protected] IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. 01/01/2012


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Clsa Gold & Silver - 27 February 2012