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The rising Aussie dollar is limiting the
gold stocks at present in addition to hurting about half of the Australian
economy. Exporters (manufacturing) are suffering, so are tourism &
education. This article examines the recent history of the AUD gold
price and gold stock valuations and profitability in this context.
Some offshore investors may be selling
down their carry trade positions at present and this is currently muting gold
stock rises here. Why not borrow cheap money in Japan, Europe and the
US before investing it in a resource economy as strong as Australia?
Especially in gold stocks which are gradually being recognized as an amazing
investment opportunity. A great move however when the currency
appreciates too fast it attaches a down side risk, which is being covered at
present. Traders are locking profits because this is what traders do.
To support my argument; Eldorado Gold
Corporation and AngloGold Ashanti are the only gold stocks not down here on
the ASX as I write this article. This is because the ASX is not their
primary listing; we trade the CDI’s (Chess Depositary Interests) down
here for these two stocks. Does this mean Aussie gold stocks are a
“sell” right now? Unless you are a short term trader the
answer is no. I shall explain why.
So how extreme is this AUD
movement? Bollinger Bands (BB’s) measure extreme magnitude
divergences of price against the moving average – big moves in other
words. This current AUD: USD move is an extreme move, more extreme than
we have seen for some time. Even the upper monthly BB of the AUD: USD
ratio has been exceeded to the upside by over 2.5c (at C), a feat last
reached in October 2007 and only the second monthly close at this extreme end
of this magnitude reached in 20 years. Here is a 20 year monthly chart
of the AUD: USD ratio:
 
We saw a 10% pullback after that 2007
event ( at B) as this ratio headed for an important pre-GFC top. This
ratio exceeded the top BB two other times to this degree, only intra-month
during 2007. In the first half of 2003 we saw three tops above the
Monthly BB of nearly 2c (at A) a similar magnitude and a 7.35% correction
followed.
At the start of a new month often
associated with seasonal negativity (May), and with the AUD: USD at an
important psychological level (1.10) it is not surprising that some carry
trade capital is being taken off the table. My Educational Portfolio
did the same last week just in case we do not immediately break the 8400
double top on the XGD (more for subscribers only). We are also sitting
on a range of quality growth oriented gold stocks in the Portfolio ahead of a
move in the second half of 2011 in this sector. What is going to drive
the move?
Before I have to listen to theories that
the AUD and gold might keep moving in lockstep take a look at this chart:
My first point is that is hasn’t
moved in lock step, well not since late 2005 which all Aussie gold bugs
remember with frustration. Before that gold was not really in a bull
market in most currencies, it was merely recovering from distorted lows below
US$420 caused by Central Bank selling and Barrick
shorting the blazes out of hoards of un-mined gold. They had a very
special deal indeed and this whole chapter is well behind us now so I will
leave it there. Many other companies had to join the shorting frenzy
that added downward pressure to gold and caused major harm to the industry as
the positions had to be unwound at much higher prices. But gold only
really started to take off with any gusto in late 2005 in Aussie dollar terms
and this is at the end of the large black ellipse on the chart provided
above.
Once we cleared that first red line A it was off to the races, in fact the
larger producers took off in March 2005 well ahead of the AUD gold break
out. Since the original launch we can see a fairly orderly rise
of gold in AUD just as we have in most other currencies. Line B was the
first level up and you can see that the break to level C preceded a correction
back to B which had now become the new support. This pattern has been
repeated ever since.
Line C was reached at the early 2008
high for gold and that would have been the high for a time however then we
experienced the GFC distortion. The AUD crashed to US60c so I have not
bothered to cover this wild spike; it was an extreme currency distortion, a
statistical anomaly.
Line D was the next logical step up
based on gold in AUD and at the last level over a year ago we reached A$1500
gold (at E) for the first time with gold high in USD as well – a broad
gold rally in all currencies is underway. Judging by previous AUD POG
consolidation periods this is no longer than the last 3 but you have to take
that GFC distortion out of view to see it. The important thing to spot
is that after reaching a new undistorted high at E, the old top D has been
tested, firstly right to the exact line and then a further test that did not
reach as deep.
How undervalued are Australian Gold
Stocks?
I have written before that the
Australian gold sector is undervalued, if you live in Australia the stocks
carry less risk in the short term because you hold Aussie dollars. In other
words no carry trade risk. The Aussie gold stocks are trading well below
levels reached back in 2006; the Producers we track are at 500 today compared
to nearly 900 in 2006, a 44% discount to when AUD gold was only $900 per
ounce. The Emerging Producers are at 105 compared to 200 in 2006 which
is a whopping 47.5% discount, and finally the Juniors are trading at 52 compared
to their later high of 78 in 2007. Need I say anymore these statistics
are raw and speak for themselves.
US investors may like to hold off
investment in this sector until the AUD sees a short pull back as indicated
above. After that I would expect massive currency appreciation by the
AUD against the dying USD over the next few years. This will add to
stellar investment returns when combined with rising Australian gold stock
prices. The story will be different for each currency, however if you
time your entry to your currencies exchange rate against the AUD and you will
gain a double bonanza profit.
Given the risk on the world’s
major economies over the coming years I consider this a prudent hedge in
addition to an opportunity. As you repatriate your returns at the end
of this coming cycle you will be one of the wealthy, but you have to get your
research right and select the right stocks – as always, some will fail
completely and some will fail to follow through. Speaking of risk I
have to ask if things get as dire in the US and Japan as we fear then will
the Governments nationalize the domestic gold miners stealing well deserved
profits from investors?
Americans will see their gold stocks
within the USA earn massive returns in USD terms which will become less and
less valuable offshore. This will be the negative effect of the sinking
USD, reducing purchasing power outside the USA in addition to US inflation as
all imported goods rise and rise in price. This is a tragedy in the
making and I can only hope US citizens can protect themselves in greater and
greater numbers.
Now back to Aussie gold stocks. We
have to take the uptrend in the AUD price of gold seriously. After a strong
move in this chart for over 6 years now it is clear this is a long term trend
and can be trusted. Many of these producers are very profitable at the
current levels of circa A$1400 gold and at A$1300 as well for that
matter. Any of these can see upward share price movement on solid
organic growth and move against a mild correctional trend at any time.
Most gold stocks are not going to see
significant margin pressure if we go back to A$1300 POG however their margins
would certainly shrink pulling back their share prices. The lower cost
producers would be expected to do the best during such a consolidation but it
also depends on who has to sell and how heavily exposed they are.
Remember that the largest stakes tend to be fairly stable because it is hard
to accumulate a position of magnitude. The explorers, small developers
and high cost producers would do worst.
Before you think I have decided this is
happening right now let me also state that given the Fed speech the other
night gold can keep going up here. Continued negative real rates will
continue to put a fire under gold. Add a flare up in Europe or the
Middle East (take Syria for instance) and we could see a perfect storm merge
for gold right now. It could still roar in all currencies taking the US
POG straight to US$2000 and the AUD POG up to the next logical step of A$1700
gold. Each step so far has seen an A$200 POG step up so I consider the
trend is clear and intact. Is there any other possible conclusion from
this chart?
In this event the XGD and the Aussie
gold sector will perform strongly because the market is gradually waking up
to what I have been saying for quite some time. The buying under
Goldman Sachs nominees and JP Morgan nominees indicates large fund buying
– the big boys are getting set for this now – building a large
stake. I greatly admire Sprott Asset
Management as well and they are doing the same.
This is the only worthwhile game in
town. Forget bonds and real estate - no upside potential just downside
risk. This is now becoming evident to the general market and I
don’t want to see investors get burnt. Forget underperforming
gold stocks - same story so there is plenty of work to be done here at GoldOz and at your end too for us all to make the best of
a really poor situation for the general economy.
At present in May 2011 the US POG (Price
of Gold) is going up because of the continued Fed policy to deliberately
debase the currency. It is keeping interest rates (Fed only) at super
low levels causing negative real interest rates – inflation is higher
than current rates. This level of AUD appreciation may not continue
against other currencies however it is likely to continue against a slowly
dying USD. The point is that gold will rise against all currencies over
time as it has for several years to date – the trend is clear. Until
fundamentals change the trend will not change.
My conclusion is that there are times
where the currency moves can temporarily hurt the Aussie gold stocks and this
is currently a testing time for sure. This is an effect right now;
potentially with some offshore selling to lock in share price movement
combined with AUD strength gives them a double whammy profit bonanza. A
quick 10% correction in the AUD would be a great re-entry if you are
confident enough to pull this move off. The trend in gold and AUD gold
is clear – and the stocks are still drastically undervalued by this
metric.
But we are near a break point right now
– poised to consolidate further or rise strongly. The May
seasonal factor has not worked in the past few years – this is time to
watch very very closely. The bellwether
signal article I produced seems to indicate the stocks here would be inclined
to churn or consolidate here for a while before resuming a strong uptrend
into the second half of 2011 and beyond. Our Gold Membership is still
on special at present if you want to take advantage of our extensive research
and back issues of our Newsletter you need to act now.
Good trading / investing.
Neil Charnock
Editor, Goldoz.com.au
REGISTERED ADVISOR – WHO THE ADVICE COMES FROM
IN THE GOLDOZ NEWSLETTER:
Colin Emery is currently a Branch Manger and Senior
Client Adviser of a Stock Broking Company in Queensland Australia. Prior to
his work in Share broking he spent nearly 20 years in Senior Management and
Trading positions in Treasuries for major International Banks such as Bank Of
America, Banque Indosuez, Barclays Bank, Bank Of
Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in
New York, London, Singapore, Tokyo and Hong Kong with these institutions. He
also was Global Head of emerging energy, emission and commodity products for
the leading Energy and Commodities brokerage firm of Prebon
Yamane Ltd – Prebon Energy for four years
before moving to Cairns in 2003 to focus on the Stock market and Private
consulting work. The private consulting and advisory work currently
undertaken is with companies involved in Resources, Energy and Renewable
Energy and Forestry.
Neil Charnock is not a
registered investment advisor. He is a private investor who, in addition to
his essay publication offerings, has now assembled a highly experienced panel
to assist in the presentation of various research information services. The
opinions and statements made in the above publication are the result of extensive
research and are believed to be accurate and from reliable sources. The
contents are my current opinion only, further more conditions may cause my
opinions to change without notice. The insights herein published are made
solely for international and educational purposes. The contents in this
publication are not to be construed as solicitation or recommendation to be
used for formulation of investment decisions in any type of market
whatsoever. WARNING share market investment or speculation is a high risk
activity. Investors enter such activity at their own risk and must conduct
their own due diligence to research and verify all aspects of any investment
decision, if necessary seeking competent professional assistance.
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