Gold has roared an assertive “here
I am” as a wider group of investors realized the problems in the
financial system were worse than they previously thought. It is hard to
let go of a concept when you are taught something and believe it for a long
period of time. This is especially hard when your model fits the world nicely
over this time span. I have not written this article to be condescending I
sincerely understand how hard it is to let go of a newly broken concept that
has worked in the past. I believe this is the hurdle that is gradually
breaking down and changing sentiment in the precious metals sector. Gold
stocks are now freshly coiled and raring to go up.
I have watched the journey from 2001 and
have read comments over the years that speculated about what price level
would finally ignite strong interest from the general public. It was going to
be the old yearly closing price record and then the 1980 high, then $1000.
The key is not actually a number it is sentiment and for gold this
takes the form of fear. Things have had to get so bad that the old belief
systems had to be challenged in the minds of people who have made money by
investing in other asset classes in the past. They had to reach a tipping
point where gold answered their concerns. More and more investors are
reaching the conclusion that they need gold and silver in their portfolios.
As gold commentators we are no longer
reporting on the tell-tale signs and cracks in the landscape, or looking for
potholes in the road ahead because we are all staring at the event now. We
are no longer trying to explain that this will happen because it is
happening, so the educational focus of my service also has to change with
current circumstances. My time will be better spent talking about portfolio
strategy and gold stocks now to maximize profits.
Some basics about relative share prices
might be a good place to start. Gold was A$518 in August 2001 just after the
bottom of the gold bear. The XGD at the time was so unloved that some gold
stocks were selling for less (smaller market cap) than the cash they held in
the bank as deposits. It languished in apathy at around 1000 points at the
time. The sentiment was as low as you could ever see because gold was
seen as dead and buried.
By August 2005 we saw A$575 gold as the
AUD had rallied from US52.5c to US75.5c. Gold was trading at US$434.
Cost of production had risen and margins were thin, however even some meagre interest in gold stocks had driven the XGD to a
more realistic level of 2700. Sentiment was changing rapidly in August 2005, in
a similar manner to right now. Gold was set to rally and the market knew
gold stocks were undervalued here in Australia and North America. Here
is where we were then, in the red circle. Gold had hardly moved but it was at
the beginning of a significant rise.
Now fast forward to August 2007 and gold
had risen to US$673 (A$821) and the AUD had risen to
US81.2c. The XGD had risen to 4870 and was set to run hard to 6900 in
November that year as gold rallied to the old 1980 record of US$850. The XGD
made two further peaks at the same level in January and then March 2008 as
gold ran to US$933 and US$1,033. The gold stocks were selling off, failing to
push the XGD up through 6900 because the early buyers were taking profits. To
keep this in perspective we just tested that old 6900 level as new support a
few weeks back. Cost of production had been rising sharply at the time
however sentiment was high on gold stocks.
Then came the rest of 2008 and you can
see that “horrible correction” in gold if you look hard enough.
The huge crash in the monthly RSI gives that move away as gold plummeted to
US$681 in the October of 2008. November 2008 saw a reversal and recovery to
US$816 per ounce and the AUD was US65.4c giving a local gold price of $1,247.
The XGD had recovered slightly from panic lows up to an extremely cheap 3678.
Equities recovered as the world
financial debt bubble was brought back from the brink for another round of
pump priming and it was severe. Mega trillions were added to the system as
new debt, to bail out banks and buy all sorts of distressed assets. This
emergency action did avert a deep dive into the abyss there is no doubt about
that. However the problem was not solved so we were destined to
continue down the current course.
The XGD never really recovered from this
time when compared to gold. August 2009 saw the XGD at 4940, August 2010 saw
6900 again and August 2011 has now registered 7700 as it comes to a close.
Gold has moved from A$1127 in August 2009 to A$1400
in August 2010 and is now at A$1676 after this recent correction. You
would think I would create a relative index to analyse
this and I have. However there are more important matters than straight
mathematics and scientific ratios at work here and to print them would not
clarify the picture, quite the opposite. Things have changed significantly.
Cash costs were rising into late 2007
however this abated to some extent in the 2008 meltdown. Costs have continued
to rise however gold has risen far more quickly. Despite massive reinvestment
and ore feed utilizing lower grade ore to maximise
mine life and all related mining issues we are now seeing robust margins from
even the higher cost producers. If we are back at August 2005 in relative
terms then the following rally will be explosive. My deeper research
points out that there is a high probability that we are, time will tell very
soon but all the signs are there again.
I have not seen excellent sentiment and
gold stock behaviour like this since
mid-2005. As gold rises in all currencies, faster than their
fluctuations against each other, more and more investors are drawn to gold.
The Greek 10 Years bonds have blown out to 17.54%,
the spread is 8.82% worse than a year ago. How does anybody finance
themselves at that rate and remain solvent? Portugal is at 11.9% for their
10year bonds, fortunately Italy and Spain have settled down thanks to
intervention – for now. I have been following this aspect of the
global economy in my Newsletters from the start, and in articles like this
for even longer.
This crisis has not been resolved and
growth is weak on the global front. Even weak growth is being celebrated in
the markets by equity investors. The growth is not keeping pace with
inflation and not enough to create jobs growth. The Fed speech was excellent,
didn’t spend a cent and at the same time gave the impression they could
be relied on. Middle of the road what a high wire act that is in this
market climate, I take my hat off to them.
I have undertaken a significant study of
gold in my latest Newsletter (for subscribers only) that examines seasonal
influences on the XGD throughout the gold bull to date. I can state
here that the last 6 August’s have been at the beginning of a strong
rise over the following 6 months. Even in 2008 after stocks crashed into
those November lows we saw a higher level than August of 2008 by February
2009. The key to making money from this rise has been in stock selection and
portfolio management.
In my latest Newsletter I also examine
some deeper charting concepts. They have helped me to maintain our
Educational Portfolio in profit, even in the bottom days of recent
corrections despite starting it in February of this year. We are now up
around 20% to date in the past few months; therefore our leverage will be
fantastic on any significant rise in the XGD.
We have just a few remaining days before our Membership costs rises a little
back up to normal levels and we have introduced a sample area for new Members
to get a taste of our Educational Portfolio and Newsletters (5 recent issues)
for just A$25 if you have interest. This is very cheap research and quite
extensive. This is perfect for self-managed Super fund operators as it
focuses on education. It shows weightings and stock choices that have been
winners lately, and are expected to perform well in the coming share run.
This is not the time to be out of gold stocks the fun is just beginning
again.
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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