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Introduction
Isn’t that
funny; everybody is getting risk adverse again - what a surprise.
Before I highlight an excellent strategy for US and European investors I need
to announce two general warnings about the near future. Markets are
currently irrational and dangerous because they have factored in growth based
on wrong assumptions. This has recently led to the wrong stance on risk
in the global markets as well. We have been warning our Members about
this and related issues for a few weeks in our newsletter – ahead of
the recent high so they had the opportunity of selling into the strength.
Earlier in the year
I called for a buying season for the Australian gold stocks in May and June
and it was a good call. Sixteen of our stronger gold producers made
lows in that time frame and then went on to rally however like elsewhere else
the rally has been lacklustre. The emerging gold stocks did better on
average than the larger stocks on an unweighted basis. Volume is not
there because liquidity has been drying up it is as simple as that.
There is an increasing probability that offshore buyers from Europe and the US
will get an even better opportunity here than the May to June period.
All of my research points to the likely probability of a really exciting
investment opportunity in the coming weeks. More importantly this could
be a key opportunity to get some investment funds to safety out of the US,
the UK and Europe.
Conditions in the
US, Europe and the UK
are clearly deteriorating however I would not advocate a move into the
Australian gold stocks just yet. Yes the mid to smaller end of this
sector is extremely good value right now, just as it was in August 2008 and
you saw what happened that time as liquidity dried up.
Investment
overview
Extrapolating the
next ten years based on the past ten years, or if you like measuring
backwards to assess relative future investment returns is like driving a car
down the road using only the rear vision mirror. I literally saw
a school bus driver do this last week as he pulled out onto a state highway
with near disastrous consequences. In this investment climate you
are going to find yourself off the road in no time with this investment
philosophy or head on into a bus. Conditions are different now.
It still amazes
me to see main stream press talking about average 10% property returns over
the past ten years and ASSUMING this is possible over the coming
decade. It takes a big picture understanding of long cycles, debt
markets and monetary history to have any idea what we face in the next ten
years and even then we are only taking an educated guess. Having a big
picture view and an open mind will at least save you from that bus. Any
basic understanding of economics 101 should alert you to the fact that we are
facing a significantly more challenging investment climate than we have at
minimum in the past 80 years.
The Australian
print media seems largely unaware about this and even worse they cannot seem
to see offshore far enough to understand that the Australian economy is a
part of the global system. Given that we are reliant on global
debt markets and economic growth constraints like everybody else I have to
wonder about the waste of black ink and paper when I read some of their
misinformed missives. The looming devastation effect on many Australian
families is the worst aspect of this travesty.
The first warning
is therefore – don’t believe what you are reading about property
investment in Australia
or any investments for that matter at present. The second warning is
related to the near term future due to changes in the Financial Regulations
Bill in the US
and conditions in the debt markets. There is no epicentre to this
disaster however the common thread is excessive debt levels. The problem
exists in at least 32 states of the USA,
the UK, most of Europe
and Japan just no name the main problem areas.
We have been
saying that the global economy, gold and equities will soon enter another
crisis phase similar to GFC1 due to a lack of liquidity. Each asset
class will react differently as this unfolds further. There is
some talk around the market on aspects of the changes in the bond markets
however not many investors have picked up this and understood the
ramifications. We did and we have been telling our Members quietly for
a number of weeks.
Emergency
Newsletter
On July 26th
I released an Emergency Newsletter that explained some new events that have
still not rippled through the system as yet. We were discussing the
implications of the recent Financial Regulations Bill and had this to say:
“As one
other experienced market participant put it - "It's still kind of murky,
I've been involved in the asset-backed markets for 18 years, and I don't
understand [the legislation] at this point. If I don't understand it, a
lot of people don't."
Editor’s
comment: Well if he doesn’t understand this then what hope
do the equity investors have. Debt is a foreign area to them so they
will not see the effects of this coming either. The European stress
tests exposed a clearer picture on the EMU banking system debt necessitating
a reassessment of risk in the region. This exacerbates this effect.”
Since GFC1
regulators have bought time for some institutions to make major balance sheet
improvements and have tried valiantly under extremely difficult
circumstances. One problem is that no matter how much banks were
supported they have been playing the yield curve rather than investing in
business. Tying up their capital in Treasuries does not help
small to medium enterprises or the economy so growth and employment have been
poor.
To help you to
understand this situation I have to use a four letter word, one we all hate:
debt. The root cause of the current problem is the same as the 2007 /
2008 collapse where liquidity essentially dried up. The event I am
about to cover here has its differences to 2008 however the end result and
basic cause are the same. When liquidity dries up the whole system
freezes up. It does not matter about the fundamentals of
companies or how the economy was travelling last quarter, how many housing
starts or auto sales, none of that matters when the lifeline – money
and credit – are severely disrupted.
For example
Lehman Brothers Holdings Inc. held debt with 10 year maturity until the
market downgraded this to 365 days, in the end they were reduced to only 24
hour finance. I don’t know how many companies would survive that
sort of stress test. This transition only took two months from
relatively normal operation to bankruptcy and it was all down to, when you
boil it down, to availability of credit. When a country gets
downgraded the debt gets renegotiated and so it is also for a company
or individual. This means that if Portugal for instance gets downgraded the
terms of the debt they hold can change too. What may appear to be a
sustainable interest rate or maturity profile can change at the stroke of a
pen making the whole scenario very sinister indeed.
If you
don’t think this causes you any concern think again. Gold and
gold stocks will be affected in addition to other asset classes.
There was already
uncertainty after the stress tests in Europe however this was nothing to do
with the results. As you all know, only 7 banks failed out of 91.
The problem for fund managers involved in the bond markets is that the data
for Europe is now more transparent on all the banks. How are they
going to buy Greek debt or Spain et al. when the numbers are right there in
front of them? The funding counter party risk is not pretty here I
assure you. The sovereign debt is tied up with the bank funding and
company debt is there clouding the picture too. With growth poor this
is only adding fuel to the fire.
If these managers
buy this debt they may face all sorts of problems down the track if it can be
proved that it was not a wise move. The major problem lies in the
fact that the majority of the bond funds cannot buy unrated bonds in the
giant international US$ Euro market. It takes somebody with
experience setting up funds and running them to see this from the helicopter
view. It also takes somebody with extensive macroeconomic smarts and
substantial bond market experience to see this mess for what it is. We
are back where we were in 2008 in many respects so you might like to batten
down the hatches.
Disaster or
opportunity
When risk is off
the AUD gets sold off too. We are currently up at US89c for the AUD as
I write this article so there is plenty of downside risk – or
opportunity depending on how you play it. If debt market conditions
continue to worsen in the coming weeks as I expect we will see much lower
levels on the AUD, not just US80c.
Europe and the US
are likely to go much deeper into recession than Australia longer term so
this shorter term opportunity is going to be your chance to protect your
capital or even score a 10 bagger if you live in the US or Europe. Of
course you will have to choose the right stocks and time the event
properly. Any sell off in the gold stock sector here will present
stupendous value as you will get a rise in the AUD back up on carry trade
activity in addition to gold stock price appreciation.
In 2009 we saw
many prime gold stocks quadruple off a very low base and the AUD also went up
circa 50% in a little over a year. A few elite gold stocks went up much
more netting huge gains for offshore investors as they also added the
currency gains. Australian investors might also want to look at doing
their due diligence on this gold sector ahead of the coming near term
opportunity. There is currently no rush which is just how we like to get
prepared here at GoldOz. Take our time and watch your ideal portfolio
selection approach price targets, know which ones you want to buy and what
your weightings will be ahead of the pack.
This Australian
gold sector has not had a broad based rally of any significance since
2006. 2007 was poor, 2008 was a disaster and 2009 was only coming off a
very low base to produce those huge gains. That 2009 rally barely
reached half of the 2007 levels that were well under the 2006 highs.
2010 has been a period where the spring is getting coiled tighter and
tighter, with the odd tiny relief rally. Where will you be when this
snaps? Will all your assets get caught in the US, UK, Europe
perhaps? We have just introduced an exciting new free feature at GoldOz
– interactive
Australian gold stock charts and our GOLD ETF is there too. The
only listed gold asset on the ASX that appreciated in price during the last
crisis was this ETF (ticker ASX – GOLD).
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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