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I have been tracking the gold stocks
since gold began to rise in 2001.
I am a self-confessed screen jockey so I have seen every phase, quirk,
lull and rocket ride this sector has had to offer over since it all
began. I love the markets. There have been exciting explosive
rallies for gold stocks; a new one has been long overdue. I have watched, analysed and
successfully traded this Gold Bull Market (GBM) since it started therefore I
hope am well qualified to bring you a valid point of view and an important
message.
If I told you that we have a number of
gold stocks breaking new highs at the moment in this market would you sit up
and listen? Operational issues
for a larger gold stock are hiding the overall sector performance in the
weighted ASX – XGD index.
This one stock distorts the real picture on the index because the
stock is overweighted in the index.
I am not saying there is a mistake I am saying the disproportionate
influence of one stock is clouding the picture for investors who do not
closely analyse the ASX – XGD index like I do. Most mainstream investors only
watch the Top20, therefore they are missing the
overall sector performance and activity.
There is no doubt that economic
sentiment in Europe and the US has been dragging on our market here in
Australia. The DOW is crashing,
Greece has defaulted and the smell of contagion is in the air. When I look at the DOW however I see
that after months of fear and gnashing of teeth it is still sitting up at
11,400 this morning. A correction
is needed you say well one observation I have made is that if you adjusted
the current DOW level for inflation of just 3%, then the high of 14,000 in
late 2007 is equivalent to 15,757 now.
This adjusts the current level and correction significantly with it
equating to a fall of 27.6% from the inflation adjusted high. Gold traders know well that inflation
measured by the official rate is a massaged price inflation measure not a monetary
inflation measure.
Monetary inflation is measured by the
increase in debt which is an increase in the money supply. We live with a debt based monetary
system. Money is created as new debt. The brilliant work at shadowstats.com
shows us that money supply (as measured by the broadest measure M3) was still
increasing at an average of approximately 13% in 2008. In 2009 the rate of increase in M3 money supply was falling rapidly however
it still averaged around 4-5% as it fell from a 10% increase in supply to an
actual decrease in supply by the end of that year.
This was caused by deleveraging; the
greatest debt bubble in history is unwinding as the corporate and private
sectors bunker down and repair their balance sheet. The actual supply of money has
effectively flattened since mid-2008 which is why we are back to more
historic growth rates. Higher
growth rates in former years were turbocharged by the debt binge. Eventually the corporate and private
sectors became debt saturated and had to back off, take a breather.
Governments have taken on the job of
borrowing to keep the game going.
This is now coming into question as seen in the news of recent
times. Sovereign debt levels are
very serious yet countries are actively trying to weaken their own currencies
for competitive reasons so they dig deeper into debt. This government borrowing has also
offset the monetary destruction caused when people actually pay off some
debt. Create money via new debt;
destroy money by paying debt levels down.
There is another aspect to all this
however and it is the driver of all markets. Capital waves in this day and age are
extreme due to the massive amount of debt / money in the system. I hope you have all seen the charts on
monetary growth since 1913. Now
M3 is not a perfect measure of money in the system yet is the best we
have. It shows we are still
hovering at nose bleed highs after the debt binge that accelerated this
supply after 2001. All this money
is now in the system at least for now and it seeks a home which will be
determined by sentiment.
Sentiment drives the direction of money in between asset classes. The money has to go somewhere and at
present the talk is of a banking crisis.
Do you really feel safe with cash in the bank during a banking
crisis? A portion of this money
is working out where to go, trying to pick a trend.
The US Treasuries have seen a massive
inflow of late pushing yields to record lows. This is likely to reverse soon even if
yields do fall a little further.
Talk about a trade getting over crowded. I called a top approaching and time for a reversal signal to form
when we first reached these highs a number of weeks back. This will reverse eventually as all
crowded trades do.
Fear in the system has resulted in a
rising gold price due to the safe haven trade. This is not only reason gold has been
going up in price just an added factor lately. This fear is also leading to cash
hoarding by corporations and individuals who see lower growth or recession on
the horizon. A massive amount of
capital has sloshed over to the Treasuries. We are talking about trillions of
dollars being liberated when this eventually reverses and the cash sitting in
bank accounts will also get nervous if fear of bank default rises back to
extreme levels.
The direction of capital flow depends on
what the market is fearful about at the time because it all comes down to
sentiment. Gold will benefit from
the fear whichever way the capital flows are headed
on this fear trade. Until the
imbalances and uncertainty in the financial markets are sorted out; gold and fear will remain in bull
market trends. This will remain
volatile.
Negative real interest rates create a
certain loss for bank deposits.
This is also what we see at present. Conditions are gearing up for a change
in market conditions again in the near future. The capital wave will slosh back the
other way and you have to be asking which
way will it flow next? Which
asset classes will benefit next? Gold
is facing the strong seasonal demand from India now and you have to combine
this with Chinese demand to calculate price support or appreciation over the
near term. The gold equities
(gold stocks) are now recognised to be in bargain territory compared to
gold. Should gold continue to
remain bid and up near these levels or higher things will quickly get
interesting in this space.
The action on the DOW lately and in the
European stock markets has suggested a negative capital flow. In fact this has been in force for
some time. We have seen a greater
correction in inflation adjusted terms than is evident by the raw data. Chances are the next capital wave will
seek yield and capital growth as risk
off swings back to risk on. Then again it might just be that the
bonds start to sell off on severe US dollar selling, yields spike back
upwards in the sell off and the capital wave leaves bonds in the
process. This capital wave has to
go somewhere.
There are limited options, limited
choices. The likely policy
“solutions” to emerge from current political and regulatory
debate will involve more money debasement in the form of stimulus, tax cuts and
continued low official Central Bank rates which will keep gold bid.
Where am I going with all this?
There is an opportunity of such
magnitude before you now, if all market participants realized the upside
potential of this Australian gold index right now it would rally from market
open to the end of settlement every day.
Rallies often begin in the grip of fear and rally into a wall of more
fear. Sentiment is changing / has
changed on the gold stocks and some excellent research is emerging to support
this view.
My long study of the sector has taught
me the signs to look for and more importantly the optimum strategies to
exploit such opportunities. The
first thing to establish in order to communicate this message effectively is
to provide a backdrop. My
research indicates that the last time we faced such an opportunity was in
about March 2005.
That year the larger gold stocks started
to rise aggressively. We
saw them take off one by one from around the end of March. Firstly they broke out of base formations
and then through old resistance levels.
By July the more prospective mid-cap stocks and many explorers began
to move with the larger low cost producers. The rally took on a life of its own at
this point. Most days saw a sea
of green arrows (rises) as the index was pushed higher. Of course nothing goes up in a
straight line so this was punctuated by brief pull backs that threw those who
were not in tune with the market.
By November all boats were floating
higher as small cap explorers joined the party. They rose with the rising tide
as the excitement spread through the sector, then came the December
lull. The mixed nature of the
activity, defined as share price behaviour (SPB) was sufficient to fool some
investors as the rally progressed.
However on balance the sector as a whole was making strong steady
gains. I now see a repetition of
that early SPB at this time and this masks what is before us.
Some stocks were even moving in between
Christmas and new-year in 2005, as hardly anybody looked. The new-year started with a
blast upwards, right from the opening bell in early January. Yet most investors in Australia were
not looking so they missed it. By
the end of January this sector rally had spread widely as greed entered the
equation. Investors got back from
the Christmas break only to find stocks had moved higher. Into mid-February however, the gold
index (XGD) started to sell off as gold maintained its ground.
A second gold price up-leg pushed gold
up from March to highs of US$730 by May 2006 however many of the stocks refused
to follow through. There was
strong movement in the XGD however unless you understood the sector as a
whole it would have been harder to interpret or make a profit. By April we saw an XGD top over 120%
higher than a year earlier, at just below 5000 before a sell off into May of
20%. A different selection of the
stocks rallied into that second up-leg, most of the early movers failed to
rally higher however as the savvy market players sold off into the late
demand created by the new comers.
A second group of newcomers were dazzled by strong gains and bought
this second group of movers. You
do not want to be one of these new comers at the end of this new rally. This is the time to seek help if you
are not certain how to maximize this opportunity.
I digress, sorry back to 2006 and the
story. Gold kept going in its
long ‘step up’ rally formation after an ‘earth
shattering’ 25.6% sell off from the May high
of $730. If you look back at the
chart now it looks minor. Get
used to this phenomenon if you are new to this GBM because us long termers have seen it many times. The gold stocks remained strong at
times after that initial sell off into the second half of 2006. The stronger
companies recovered lost ground rising higher towards August 2007 where a
sell of 15.5% reversed by the end
of the month. These events have
been quite common for gold stock investors as well throughout this GBM. In September 2007 we launched again
however it was a mixed rally.
We reached a new XGD high by January
2007 at 6940 as Newcrest Mining hit $39.75. Gold powered to new record highs at
$1030.80 by March 2008 however the stocks failed to join the excitement as
equity investors savvy enough to be watching the debt markets sold off their
shares. The 2008 melt down
then took hold all the way into the October and November period for gold
stocks and March 2009 for the broader market.
The crash of 2008 shocked investors
causing horrible losses in superannuation funds and private share
portfolios. Self-managed
superannuation funds have proliferated since this time as investors took
their capital into their own hands. This was a shocking event that
still carries a stigma even for gold stocks. I was there telling investors to
wait until we see the whites of their eyes. I wrote in September 2008 that the
bottom was close which turned out to be true as the Aussie gold stocks
reached their individual lows from late September through to November that
year. I could not believe my eyes
at the time, such were the extreme bargains. Yet investors sold or stayed away in
fear.
Sentiment fell even harder than the
stocks; investors stayed away and still fear a repeat of this event as we
watch the trouble in the financial markets. What they fail to understand is
that each new phase of this global debt collapse and gold rally brings new
circumstances.
The XGD has gone on to make new
post-crash highs however the same cannot be said for the broader market. History repeats however it is never
exactly the same. Gold
stocks may surprise many investors causing them to miss out this time if we
do melt down.
What logic do I have to support the view
that the gold stocks are set to rise?
Over three and a half years after January 2008 we find the gold price
has nearly doubled. The
cataclysmic collapse of share prices
and sentiment during the GFC saw extreme gold price lows. By the end of 2008 the XGD fell
below 3000 briefly to a low of 2674.4, from a high of almost 7000 a year
earlier. This almost took us back
to March 2005 levels on the XGD when the AUD gold price was just $553 an
ounce.
This was a distortion and a major
dislocation in the gold stock rally that had to correct sooner or later
because profits and resources were rising. This process is still not complete
however and the recent gold price rise has distorted the relationship between
the stocks and gold yet again.
When the XGD hit the 7000 area in March
2008 gold was under A$1100. We are currently sitting nearly 70%
higher for the Australian dollar price of gold with no gain in the XGD. The fundamentals have changed up
a gear for the gold stocks because costs are not rising anywhere as fast as
the gold price. Margins
have increased by far more than 70% however far more importantly
sentiment is changing now.
The Australian gold stocks have not (so
far) moved again as strongly as a coordinated group since March 2005. So you may ask what was it that
caused that rally from mid-2005 and why do I suggest that this is a repeat or
similar event? The GBM had just
entered a new phase in mid-2005 as it began to appreciate substantially in
all currencies. The leading gold
stocks were telling us something in the early stages of that rally.
They are behaving the same way
again. Gold looks to have started
another new phase as well as evidenced by the larger than recent price
rise. No previous single up-leg
has pushed the price of gold up $500 in one hit. A similar change in price rises came
very soon after the gold stocks took off in 2005. One could argue when the bottom was
set at the beginning of this rally however we have traded into it based on
our systems and signals to get set and in a nice profit at this stage. We consider the bottom was March 2011
this time and that a second bottom was set at the end of June as well.
It is easy for me to recognise the same
early signs again, as I did over the past 8 months, because I have seen them
before. You are about to get a
heads up that such a time is again brewing. In fact my understanding and in depth
analysis have progressed to a whole new level thanks to constant study. This is not a gloat it is a function
of experience, practice and concentration.
As a high profile contact I recently
spoke to said “the more you get involved in the markets the more you
discover”. My
analysis tells me we are starting the second stage of the initial lift as the
larger stocks make their initial move.
This is very similar to the May 2005 conditions. It is not too late for you to get set
at base levels; that is if you do move now and get your homework done you can
take advantage of this opportunity.
If you wait too long you may find yourself in the
‘newcomer’ group at precisely the wrong time in several
months’ time. At this early
stage I have no idea how long it will last only that the top will reveal
itself when it arrives if you know what to look for.
You make your money in the stock market
when you buy. You get to keep it
when you work hard enough to manage your risk and your portfolio with
sufficient skill. We offer
education on a gold stock portfolio and all important factors that influence
gold and the gold stocks. You can
test the quality of our information for only $25 and join for as little as
$90. Escape velocity is
approaching fast why not join, or join us if you wish.
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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