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I am not preaching to the converted
however most if not all readers will know that the US banking system is in
trouble as evidenced by QE1, QE2 and now suggestions of QE3. Governments
would not offer or provide the monstrous bailouts and deposit guarantees
unless this was the case. The European bank has also taken steps to prop up
their banking system since 2008, with in excess of US$1.2T in new support in
the past 4 months. This is a global phenomenon made necessary due to the
gradual debt collapse, a deleveraging process that will persist for many
years to come.
This kicking of the can down the road is
all about buying time for the financial institutions to repair their balance
sheets. This expensive ‘time’ purchase is considered the only way
out by governments that don’t want a collapse on their watch and
because there has been a very real danger of a total collapse of the entire
financial system. The counter party risk of this intricately linked system is
highly dangerous thanks to the size of the debt, derivatives, credit default
swaps and now the bond market bubble. This is all key to understanding what I
am about to say about gold and how it fits.
The debt bubble formed over a long
period and this turbocharged growth creating a new modern perception of
growth expectations. By the time this bubble matured investors had long
forgotten about normal growth trends which were much slower when averaged
over time. Now we face the debt collapse. A debt collapse is a slow collapse.
It is a death from a thousand cuts and this is what the world faces over the
next decade at least.
I do not literally mean
‘death’ I do not see the world in total collapse, back to the
caves, as we have a good chance of muddling through eventually thanks to the
efforts of mankind. I remain a realistic optimist. The system as we know it
will certainly die in the end however I prefer to hope for an evolution of
sorts which will result in a transition period rather than total collapse
followed by the rise of a phoenix from the ashes, a genesis that might
otherwise need to arise.
At least I can see the train coming
whereas many politicians and most investors don’t as yet. The
‘growth will return’ mantra still plays its song despite the
headwinds. The combination of the 1) debt bubble and 2) need to keep the music
going to avert disaster are both factors we need to weigh up in any
investment strategy. The subsequent money printing creates an ideal
investment climate for gold. Negative real interest rates are likely to
persist while the governments monetize the treasuries. This keeps rates lower
and raises the level of cash in the rest of the system – cash that has
to find a home. Some asset classes delever and some
rise in value as currencies devalue against them.
This is all quite simple to understand
however much harder to fix without tearing down centralized power and the
debt bubble for a fresh start. The key to maintain your wealth or create
wealth from the situation is to work out the direction of the next capital
wave. You do this with in-depth research and you need to take note of what
the big money is doing.
Now back to the banks – they need
to continue the repair of their balance sheets and this can and will take
several years yet. They cannot mark all their assets to market and they
cannot reclassify many loans as non-performing. This would wreak havoc with
their reserve requirements. They are already buying gold because they know
that it will become a tier one asset that will also act as a hedge. They know
how large the hole is and this is a life boat for them too in my opinion.
This will be the biggest game changer for gold since the Chinese started to
roll out their gold retail infrastructure.
I am saying that non Central Banks are
buying gold as well as the Central Banks. This is in preparation for a upcoming total acceptance of gold as a first tier asset
for reserve ratios. Think about the difference this can make to the gold
market. Imagine banks in favour of gold rising because it improves the
capital adequacy in the system; why that is revolutionary. With many asset classes
in decline and the need for the banks to try to repair their balance sheets
gold becomes a very special asset class indeed. The Central Banks will be
just as happy about a rising gold price in this case, based on demand from
their sector as it will act as a stabilization factor in the system. This is
the game changer I speak of for gold.
And speaking of gold I see the late 2009
to March 2010 consolidation pattern is now complete in the present time
frame. The break out preceded a sharp spike then too and was followed by a
triple W shaped consolidation formation. The second low took us predictably
back to the 300 day moving average which I wrote about back in 2006. Now we
are looking like a breakout is possible at long last.
Now to gold shares and the game changer
is clear. The monster and elite funds of the world have begun to appear on
the ASX gold stock substantial holder notices. They have been accumulating as
the market fell to undervaluation extremes. Now we have an elite Chinese entity
Zijin Mining Group Co., Ltd taking a partial
control (takeover) play on a highly undervalued Kalgoorlie miner.
Their Chairman announced their plans to
set up an overseas financing platform for its foreign assets. They plan to
invest as much as 5.5 billion yuan ($880M) per year
buying gold mines and companies, mainly overseas he commented according to
businessweek.com over the weekend. This is just one interested Chinese buyer
soaking up gold miners while sentiment bobs along the lower end of the scale.
This heats up the ante for local Funds and institutions as well as the likes
of Sprott, Blackrock, Van
Eck et al. which have all been appearing as well.
If only mainstream investors saw the
same value and understood what is happening the global financial system. As
an old friend from the banking system (ex-bond trader and structured
products) told me the other day the bankers are looking for vehicles to
maintain their standard of living and do not have a lot of options. Yield and
preservation of capital are two aims however capital growth is a higher
agenda; now that is an interesting story.
The disconnect between the
price of gold and the gold stocks has been of intense interest to me over
recent years. Are we finally ready to take this sector for a strong rally?
That is the burning question. Market leaders on the ASX have done extremely
well over the past 12 months and have moved ahead of the rest of the stocks.
Only our heavyweight NCM has lagged in this category disappointing the market
and dragging down sentiment. I have covered reasons for this in my
newsletter.
To view the above phenomenon I present a
few charts to finish off. The first chart tracks the ETF in Aussie dollars
ASX-GOLD and this is the 5 year picture just to show you what gold is doing
in this currency. All charts in this article come with the compliments of
Nick Laird at sharelynx.com
As you see we have a well-defined and
continuous uptrend for the A$ price of gold. The price gets ahead of itself
from time to time yet it has been in this trend since mid-2005. In the top
box we have the RSI indicator and I invite you to notice how during each
consolidation phase the RSI manages to dip below the 30RSI line in blue. This
is the oversold line. Government fiscal policies and Central Bank
interventions guarantee this trend will continue until they change tack.
The bank demand for bullion is rising
and will continue especially after it is officially accepted as a tier one
asset under Basel3. Its rising value will then assist the financial system
instead of ringing alarm bells to holding it back will not be a necessary
part of monetary policy in the stabilization of the system. Now what about
the Australian gold stocks?
Here is the 10 year picture with NCM a
weighted dominant part of this index. NCM was $3 at the end of 2001 and had
risen to $16 by early 2005. NCM dragged a lagging Australian gold sector
– the XGD from 1000 to 3000 over this period. In mid-2005 the whole
gold sector took off for a strong run.
This pushed the XGD index to 5000 by
March 2006 with NCM leading the way. NCM was almost entirely responsible for
the strong run from November 2007 to March 2008 as the rest of the sector
frustrated investors.
Then the GFC hit with a vengeance
pushing the entire sector to panic lows from October to December. Sentiment
was truly decimated and so were the share prices. Many investors have still
not recovered. I am pointing out the distortion caused by this weighted index
because NCM has been underperforming the new leaders of this sector for the
last 14 months. The new leaders were picked up in our Educational Portfolio
and which, thanks to the weightings assigned, have allowed us to turn a small
profit while the index and NCM suffered.
When you take the NCM weighting out of
this index above you will immediately see what I am talking about over the
entire 10 year period. Yet some deeply undervalued stocks are now on our
radar in this sector even though another group of new early movers has led
the way. I would expect that, based on the previous experience that these
leaders will continue upwards however; the laggards with promise will play
catch up and that indicates greater capital leverage to me.
The index above has found very strong
support at 6000 and a new up-leg in gold looks like being the catalyst that
combine the interested Funds and investment groups to drive this market
upwards at last. So here is the dismal unweighted chart which highlights how
undervalued this index is when compared to the beautiful uptrend in the
Aussie gold price above.
Does this look like an overbought index
to you? The disconnect between this chart and the
AUD gold price is pronounced and will have to rebalance at least for a period
shortly. I believe it could be longer and stronger than most investors could
believe however this will require a watchful eye in case things turn against
us. Join us at GoldOz if you wish to get educated
more on this fantastic opportunity.
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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