Capital waves control the direction of markets; they are flows
of money, the liquidity that dictates direction. There is nothing like
a good gold rally because it is driven by fear. As I will explain this
coming rally is shaping up with considerable force, the capital wave to hit
this market sector will be a monumental event. You will want to be on
this wave with as much capital as you dare to commit to precious metal mining
stocks and gold (include silver).
Generally speaking the fundamental picture for gold, silver,
gold & silver miners around the world has never looked better.
Australia is a leading global gold producer and the quarry at the base of
Asia so our prospects look better than excellent going forward. Many of
our miners are making fantastic progress on plant upgrades and new projects.
They have been exploring and working with new vigour over the past decade as
conditions improved for the industry.
The gold price has also allowed for balance sheet restructure as
debt is retired. It has forced the closure of almost all of the old
hedging, exposing the industry to the full upside on future gold price
rises. It has stimulated a new range of up and coming companies seeking
to produce precious metals. We have world class mineral provinces, not
all exploited as yet. These companies possess state of the art
technologies that will unearth monster mineral deposits in Australia and
offshore and make fortunes for themselves and investors.
We have some world class international miners and a range of
world class operators in the smaller stocks down through the
ranks. This game is heating up. Conclusion: Local gold
sector developments and the global financial climate could not be more
positive for the local industry, the Australian listed gold and silver miners.
The only problem is keeping up with the changes in this fluid investment
climate.
What will drive this capital flow?
Gold is looking ready to break out and run strongly yet again as
debt markets gear up for another round of trouble. A banking crisis
could breakout at any time which is why I am keeping at least one foot in
this market at all times. One needs a core position in case we wake up
one morning and gold has jumped $40 over night at the launch point of a mega
run. Massive amounts of debt have to be rolled over in the next three
months; Portugal and Spain have come back into the limelight for all the
wrong reasons lately.
The European support package is a ticking time bomb; as it
slowly runs out of time there is insufficient time or growth to dig many
nations out of trouble. QE2 in the US is to be removed in the next few
months along with the protection and support this brings to the markets short
term.
The central banks are still buying back gold because this
essential reserve asset adds stability to the monetary system. The
authorities continue to search for a solution to workable regulation that
might stop a repeat of the GFC. They are up against a chronic
structural imbalance due to the largest debt bubble in history. Now to
a story that illustrates this point perfectly.
News just to hand, the new Irish government has come out
fighting on the tough measures and interest rate proposed by the EU on its
bailout package. Ireland wants the senior bond holders (such as foreign
banks, bond funds and insurance companies) of their embattled banks to share
in the pain, take a haircut. These banks have been very heavily reliant
on the Irish Central Bank and the ECB for short term funding in recent
months. The Irish government wants / needs a longer term solution that
also involves recapitalization; they don’t see that the Irish tax payer
should take the whole loss via tough austerity measures including rising
taxes which do not produce growth.
Maybe reports are right that this is a political ploy by the
Irish government to gain a better medium term deal from the EU however there
are other complications. The German public have sent a clear message to
Chancellor Angela Merkel that they do not want to continue to bail out
Europe. Spain is reported to be building a firewall to protect it from
the woes across the border in Portugal. This is starting to sound like
“every man for himself” as conditions unravel.
Mismatch of policy, for insurers and the banks, between Basel 3
and European Solvency 2 regulations are also creating issues. Solvency
2 policies make longer maturity bonds more expensive to hold for the insurers
(as investors) and yet banks need to issue longer term debt to comply with
Basel 3 regulations. Thanks to the withdrawal of mega Funds like Pimco and
other large players; liquidity is reduced in the debt markets. Talk of
haircuts and default equates to devastating losses for bond investors that
have put up real money.
This is a deleveraging cycle as the debt bubble slowly (we hope)
deflates. Is there really any hope this will unravel slowly enough to
avoid a rush for the exits? There is simply less money in the debt
markets, decreasing supply yet demand for debt is increasing. Old debt
has to be rolled over and new debt still adds to the load. That’s
a serious structural disequilibrium, a delicate balance is required –
not a free for all which would result in a crisis very quickly.
Yet rising demand and the more accurate factoring of risk are
pushing up yields. Rising yields reduce the value of bonds. This
is what we are facing – massive competition for capital and a rising
cost of capital. The Central Banks do not control this type of interest
rate rise they only have their own policy to control. Rising rates in
this case means rising credit spreads between the CB rates and what investors
demand in order to take on the risk of investment.
Geopolitical issues in the Middle East continue to add upward
pressure to oil prices and therefore inflation. Weather events and
drought continue to cause havoc to food prices adding additional inflationary
pressure. Everything is perfectly aligned for gold and gold stocks at
this point in history. So where are gold stock s right now and are they
already overbought? The short answers are; nowhere much and no.
Of course in any liquidity crisis equities normally sell off and so the gold
stocks can be subject to short term selling. If or when this happens it
is time to buy aggressively.
It is a long call to assume that I or any other commentator can
predict the exact launch point for gold or the Australian gold sector.
I am on record announcing the exact break out for gold on a number of
occasions in the past 5 years however this is not to say my record is
100%. It is much easier to analyse short term bounces and pullbacks as
achieved in my newsletter on occasion. I can say with certainty that
gold is very well supported near these levels and that these gold stocks are
undervalued by comparison.
Historical comparison
When the HUI rallied in late 2007 into March 2008 the Australian
gold sector was selling off. We failed to reach new highs as the
ultra-savvy international investors bailed out of Australia. Debt
market conditions had deteriorated badly in the second half of 2007 and this
increased risk on Australian assets. Funds were liquidating assets
ahead of the massive GFC sell off which saw Australian gold stocks get
hammered.
The Australian gold stocks reversed sharply off the 2008 lows
and have still not regained the share price levels attained in the highs of
May 2006. Many individual stocks have gone on to new highs I am just
talking about the sector as a whole. My thesis, based on continued gold
price rises, increased earnings and new resource upside is that this sector
will reach these old highs at the top of the rally directly ahead of us now.
It may not start for a few months and then again who can tell exactly?
Here is the point I am making in visual form, the red circle at
the top of this chart is at 200 whereas the current level of the emerging
producers is at just 112! The 200 level was the pinnacle of a 12 month
rally whereas the current level is sitting toward the middle (or end?) of a
consolidation period. Gold topped at US$730 and A$960 in March 2006,
well below current profitability levels with gold hovering around
A$1400. Put it another way – gold was A$960 with this index at
200 in early 2006 and now with gold at around A$1400 we see the index
languishing at 112.
We are sitting on a rising support trend line and all this tells
me this sector is cheap right now. Our full data base, newsletter
updates and other investment tools are for Members only. Even
deeper research is reserved for our Gold Members in our educational portfolio
which is developing in real time along with investment rationale for these
sorts of investments. I can reveal to you that the only thing holding
this gold segment back is sentiment. [Gold Membership is currently on
special and we have added new payment options in our store. Old clients
are still on the data base and are entitled to a client loyalty bonus.]
We are currently marching up strongly and only just above that
major rising support line marked in red. All three sub-sector charts at
GoldOz, like the one you see in this article are sitting on or near this type
of support. They are in the free area of GoldOz. Will the current
manifestation of the debt imbalance in Europe drive gold demand sharply
higher soon? It did last year when the Greek situation broke out as
fears of contagion took hold of sentiment. Gold was very heavily bought
in Europe. Imagine what would happen if panic buying took hold in
China! Physical demand will spill over into the gold stocks sooner or
later it is just a question of timing. This is what we work on as this
situation evolves.
The gold stocks in Australia are trading well; from juniors to
larger producers I see price behaviour consistent with the beginning, or
preliminary stages of a broad rally. I am up sharply this year and the
educational portfolio I am detailing in my newsletter is now up nearly 13% in
two months using an average of only 1/3rd of the capital. This has been
achieved quite comfortably in a flat gold stock environment as the sector
gears up for its run. The amount of capital invested here is growing as
selected stocks reach safer buy levels. As an educational point I am
selecting a range of stocks, techniques and strategies within the portfolio.
If you are not in gold or gold stocks this is a great time to
act do not delay. This is not a time for the faint-hearted. If
you are partly or fully invested do not get shaken out of the quality
stocks. Buy these dips you will thank yourself later if you do.
Investors and traders can make great gains even in current market conditions
– we are proving this weekly. Keep a close eye on these gold web
sites for updated intelligence from my peers, most are great thinkers and
work hard to bring you their research and technical analysis.
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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