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I
have taken some excerpts from our new GoldOz Newsletter service to construct
this article. Even the hedge funds boys are reportedly dazed by market
action after their worst performance in 18 months during May. Has it
been difficult to assess the markets this year? No it has been
extremely hard. This is firstly because of the political and regulatory
changes that are clouding the picture. The second difficulty is that we
are transitioning into a new financial world and I do not say this
lightly.
Take
Greece for example where there are riots in the streets and default hangs
directly overhead. They need strong growth to provide an economy that
can pay back debt and thereby overcome chronic deficits. Yet
SME’s (Small to Medium Enterprises) have only been able to borrow €85M in the past 6 months to
end June this year and at a whopping 22% average interest rate. In 2009
by contrast they borrowed €900M.
Changes
are part of the system and quite normal. What we refer to is different
I assure you. In general terms most people are chronically bad at
change therefore the adjustment will be confusing and painful for
many. What was the old normal and why am I talking about
this? It has huge ramifications for gold that’s why. I am
discussing an essential reason for gold to go up and the timing of such an
event. Even more than that; I am examining the likely pathway because
there is potentially a massive pot hole ahead.
Spot
Gold chart: 5 years / weekly
Gold
in USD’s looks vulnerable on a technical basis here so be
careful. It is sitting in a bearish rising wedge as shown in this
chart. The black overhead lines on price, RSI and MACD are
showing a negative divergence which has also crossed to the negative.
This
may not play out in other currencies however the USD is the dominant currency
as recognized by the international investment community. Unless we break above this
rising wedge soon there is danger of a deleveraging induced sell off in gold,
equities and anything else that has a bid. This year has marked
exceptional volatility due to a gradual deleveraging process which could
accelerate at any time if circumstances push the markets over the edge.
If we break to the downside through that rising support line in under the
gold price we will have to look for likely support levels.
To
ascertain what might cause such an event when the fundamentals are clearly in
favour of gold we have to look to the global debt markets. First of all
what was the” old normal”?
People
have been getting accustomed to a never ending diet of debt issuance since
Nixon reneged on the convertibility of USD’s into gold on August 15th
1971. Since then the money supply has exploded along with unsustainable
life styles as consumption was brought forward in time. Most consumers
have bought the line that wealth can be borrowed and that you can live the
lifestyle you want before you save or earn the money. They have
bought the lie that debt will be there for the taking forever and that governments
and central bankers will look after everything. No wonder we
don’t want to face any new reality because we may have to look after
ourselves now.
History
also shows there was an earlier chapter from 1913 when the US Federal Reserve
was formed. Debt began to explode after 1913 after a remarkably stable
100 years where inflation was not a problem like it has been ever
since.
The
new beginning of a brave new world started in 2000 however it accelerated
with a down turn in in late 2007 with a justified lack of
confidence. By 2009, after unprecedented monetary inflation the
money supply began to contract. Liquidity has been steadily drying up
ever since. Money supply has begun to contract because the world has
maxed out its credit limits. So have the lenders and now the great
credit contraction begins.
This
has the unfortunate potential to turn into the credit squeeze from hell
initially forcing massive deleveraging. This may be great for
gold in the longer run because it sets up sovereign default scenarios which
will severely damage confidence in global financial markets. We
may make a great deal of money out of gold and eventually gold stocks however
the social consequences are highly unfortunate.
In
the short term stagflation will be the inevitable result as some asset
classes fall sharply (read de-leveraging) while we simultaneously face rising
interest rates. This last point often confuses investors however it
will come to pass baffling many and causing them to miss the best opportunities.
This whole situation has profound influence on investing in the
“new” economy as well as gold stocks and gold.
The
global bond markets have been influenced by huge bond and sovereign funds
which amass investor funds and play the bond markets. This has provided
vital capital for corporations and governments alike as the debt bubble
grew. This monstrous pool of capital is now starting to seek a new home
and the effect will be immense. We can take advantage of this capital
wave as it seeks yield in a low yield world.
To be
clear I am stating that I believe the debt crisis in Europe cannot do
anything but spread confirming the IMF’s worst fears as they announce
their forecast of 4.5% global growth this year. Their huge caveat and
the massive growth assumptions made by governments startle this
analyst. The largest sovereign funds have declared that bonds are dead
due to the absurd volume of issuance due in the next few years. This is
incredibly important because the capital flows and effects will be
immense. Given their past support for the debt markets is no longer
palatable it will be steadily withdrawn. It beggars belief that
anybody could believe the cost of capital will not increase
dramatically. Who is going to buy all that debt? More on
this topic and Australian gold stocks is for subscribers only.
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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