Breaking news
in Australia as the Prime Minister falls on the super tax sword. PM Rudd is going
to fight this leadership challenge however this is still a great moment for
Australia. The people have already voted forcing the government to shift to a
new leader tomorrow. The mining industry in Africa and Canada, Brazil and
elsewhere will weep a few tears of sorrow. But Labor is not dead yet and we
have to see if they will now distance themselves from Henry, Rudd and the
RSPT. This writer could not imagine that they could do anything else but run
as far from this tax proposal as they can.
At least they
could then claim that it was all Kevin Rudd's fault for not consulting the
mining industry and getting the right balance, the right terms that might
have achieved somewhere near the result they were after. I do not take
political sides so I will leave it at that. I do support Australia however
and our checks and balances here prove this is a great nation.
I do also
support the mining industry and investors in our mining sector and urge the
new PM, most likely Julia Gillard, to scrap the tax proposal altogether and
go back the drawing board and fix the tax system here without slamming any
one industry. What ever happened to a government serving the people and
business by making it easier to earn a living? I have felt the confidence
creeping back into the share prices of even diversified mining stocks this
past week or two so perhaps this political move and a major policy shift will
finally reveal why.
I have severe
reservations that this current government can regain power at all in the
upcoming election. This might end up being the proof of my claim that if you
try to mess with mining here you mess with the people - this is a strong
mining culture as this is embedded in our history and culture.
I hope this
event goes down in history as proof of this concept and that our brilliant
sovereign risk status will now recover. In some ways this should prove we are
worthy of a first tier sovereign risk status as even an elected government
could not succeed in hurting this industry for long. Now back to gold and back
to the markets...
Gold finally
broke the US$1250 level this week as we gradually leave this consolidation
zone behind us and head for the $1300 level. It did not respect the $1230
level either as sinister rumblings continue to taunt investors and CB's into
the arms of gold. The inflation adjusted price of gold is still unbelievably
cheap when you factor the real inflation of the money supply into the price
model.
It is not
expected that gold would manage to rise this time of year at all however it
is. One would expect any unexpected rise in the POG to be slow and steady at
best this time of the year due to seasonal factors. This movement again shows
the resilience of this gold rally despite all sorts of recent calls for major
falls and USD strength. Gold is gradually going through the roof one tile at
a time.
The XGD
Australian gold share index is again approaching record highs after hitting
over 6650 on Monday however the end of financial year is almost upon us. There
is therefore potential for a small pull back to the 6200 area on tax loss
selling before we see a continued rise.
There have
been several strong performers during June amongst our top ASX listed gold
producers, especially those with offshore mines as expected due to the RSPT.
Monday we saw several strong performances in the sector indicating strong
accumulation activity.
This broader
gold sector now resembles a coiled spring with tremendous potential energy
after a long consolidation period. This index failed to fully recover after
the '2008 stock panic' as Adam Hamilton called it so perfectly. The AUD price
of gold is much higher than 2006 and 2008 levels; therefore these shares have
drastically under performed gold.
Here is the
updated chart of the mid tier producers showing this weeks jump to 490. I
have circled what appears to be a break out of this consolidation which is
not evident on the XGD due to the disproportionate weighting of NCM in that
index. It is on the far right and hard to see however it is definitely there.
Once we break the falling resistance currently at 550 we are off to the
races.
Volume has
been solid as we approached the tip of the apex of this formation. We have an
excellent chance of upward price action here in the second half of 2010.
The
developers who are unfunded represent the biggest risk as the RSPT (super
tax) still forces banks to factor in the worst case scenario. Hopefully this
will be resolved soon after the leadership spill tomorrow. The fully funded
lower cost producers make up the elite portion of the Australian gold sector
with much lower risk so these will rebound the fastest.
We have some
excellent emerging producers with forward P: E's less than 1 which is a
stupendous opportunity. It is the smaller gold stocks that have the biggest
potential upside.
Just a quick
note on Europe, yes I know I harp on about this however I cannot believe how
poorly debt is understood. Confidence is creeping back there too but for how
long? The recent stress tests in Europe proved nothing because they valued
the Greek, Spanish, Irish (etc) debt at par. This has everything to do with
gold so let me persevere here please. This is the source of the next burst of
interest in gold from the Euro zone, which will be strong, and likely to
produce another burst of currency volatility.
Banks can
value this debt at par at the moment because the ECB is a buyer. However when
this music stops things will change fast. At present the balance sheet looks
alright and this debt can be carried as a zero risk weighted asset meaning no
reserve requirements for the banks.
Once this
situation changes, and it must eventually, the banks need to account for this
debt as a 100% risk weighted asset meaning 100% reserve coverage and
therefore they will be forced to sell at circa 45% of face value. They will
be forced to sell because they need to balance their reserve levels. Remember
Governments cannot be declared bankrupt and put into liquidation; the debt
has to be consolidated, partially written off and heavy measures on spending
follow. Therefore the debt does not fall in value to zero but it does fall
dramatically and cause upheaval for the banks.
I invite the
readers of this fine site to visit our Members News page found in the drop
down menu under the "Members Area" tab in our tool bar at GoldOz to
see a free company update report. It is listed under June 22 so it's
absolutely recent. There is no plug in this report or special offer for
membership so this is a no strings offer. Of course new and old members are
welcome to join us so we can assist you to take advantage of some of the
cheapest gold stocks on any exchange anywhere at this time - if you are
interested.
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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