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As tax loss selling hits some key resource stocks
during June we are seeing gold, silver and some base metals bounce upwards,
initially off important support levels. The first half of 2007 has been
extremely fertile profit territory and with the strength of the AUD against
the USD it has been an excellent investment for offshore investors. I did
take the trouble to inform my global investor clients and Kitco readers that
this was a high probability in 2007- back in January.
Back in January this year I had this to say…
“Times are as uncertain as they have ever
been; this creates a fertile climate for a precious metals bull. As investors
we have to study money flows, trends and sentiment in order to stay alive and
prosper in this game. There are a number of things we can be certain about:
1. Inflation will continue (increase of money
supply).
2. Global liquidity is MASSIVE. All this
liquidity has to go somewhere.
3. Volatility including; price, sentiment and
geopolitical issues will continue.
4. Chinese and Indian workers want a piece of the
Western lifestyle.
5. Big market players (including Governments) do not
have our best interests in mind.
I suggest to you that the area of highest profit
potential for investors during 2007 will come from second guessing where all
that liquidity will go next so this is the purpose of this article. Let
us examine which trends are over and which trends will continue.”
And then I also wrote…
“So, assuming bonds and property are poor investments
in 2007, perhaps the general equities may also be topping… where is the
current opportunity? The contrarian in me indicates commodities such as gold,
silver, PGM’s and even copper may not be as poor as you would
expect. If that was a top in copper it was the strangest top I have
ever seen. Only copper and oil have dragged down the CRB index to date
with aluminum, nickel, zinc and lead all near record highs. The resource
sensitive Australian dollar is near record highs. Copper is being talked and
sold down with gloomy US housing figures yet US housing is not the key to
copper prices…China is.
Sure copper prices are unlikely to reach the
parabolic heights of 2006 however if energy and other cost pressures reduce
as is the norm for this part of the commodities cycle the resource stocks,
including copper equities may be far better investments than investors expect
as well.”
I am very pleased to have stuck my neck out and made
that call, it was no guess however public view predictions can potentially
leave you with egg on your face at times. The fundamental research I have
conducted and that which was confirmed by Colin Emery, Gold Oz Newsletter
contributor, has allowed me to confidently invest on this strategy. Colin has
traded metals for nearly 30 years and at a very senior level for the Treasury
Departments of major International Banks for half that time – a highly
valuable second opinion in anybodies book. His resource company experience
allows him to understand the resource stocks Down Under better than most as
well – in fact he has worked as a consultant for many of them including
the biggest.
This article has a similar purpose however more
specifically for the second half of 2007 which is now almost upon us; now is
the time to get set. Colin and I share the same concern, as the metals
weaken; the hit rate on Kitco drops, our subscription rate drops… the
same old fear and greed rule the day.
This level of uncertainty has led to one resource stock I have just
bought, being heavily hit from $1.40 recently to the 90c range and they are
mining nickel and copper with zinc to re-enter their income stream. They
are back at about $1 ($1.10 a day later as the vastly over sold condition
quickly reverses) as I write and at $125M Market Cap and yet they would be
earning a gross profit of about $2-$3 M per month at their current rate of
production. This is set to rise yet the tax loss selling was ongoing for its
own sake and created a fantastic opportunity. Another prime resource stock I
know of is selling at a P:E of under 5 and there are other similar situations
– these are misunderstood gems and the second half of 07 is
misunderstood too in terms of ongoing commodity demand. These stocks are not
“penny dreadfuls” either – they are quality companies
growing excellent projects.
This is precisely when investors should be
subscribing, getting better educated, picking out the elite stocks, hitting
Kitco for regular price updates, product and opinion – and buying
undervalued gems set for price appreciation. We are concerned that our
clients and all investors get this right yet the indicators are that this is
not always so. It is not easy to do, buy when things look bleak - even if it
does sound simple – once these stocks take off the timing risk
increases and the prime leverage opportunity dissipates.
A great term – prime leverage…I mean
that buying close to lows produces much larger percentage gains in your
capital (prime - meaning number 1, A1, optimum) and therefore you do better. This
is simple mathematical theory. I use the word dissipates as it refers
to a dispersal which is like a spray… price rises cent by cent
and buying opportunities can be seen to be spread across the higher and
higher price spectrum. The higher the share price rises the lower the net
and percentage gains become.
Take my purchase in the stock mentioned above
– I see $1.40 as a near term price target (later to over $2) and now
have an average purchase price of $0.95. At $1.10 in a few days I am up
nearly 16%. At $1.40 this would be a 47% gain however if you wait until
you are certain it is in a strong uptrend it will be trading at mid
$1.20’s or 30’s and you may expect an initial 10-20c gain, (7.6%
- 16%) however with higher risk and a chance of getting chopped
out on a stop loss as it next consolidates. It is technical analysis
and “whole picture” fundamental research that identify these
opportunities. At $2 I would be up over $110% yet if I waited for it to
break that $1.40 level and confirm the rise I would have stiff competition
for stock and a maximum gain from $1.45 to $2 would be 38%.
So how did the commodity stocks perform as a whole
in the first half of 2007??
Take a look at how the ASX S&P 300 Metals and
Mining Index has performed since January in the graph below. This index
of ASX Resource stocks has moved upwards from 3300 to about 4300 and the
opportunities are still significant. There have been some star performers in
this index; they have done far better than the general index - and I see an
equal performance from some in the second half of 2007 as this relentless
commodities boom continues Down Under.
BREAKOUT - Feast your
eyes on this chart above for a time; at the far left there was a spike to
about 3400 eighteen months ago and then a break out to the 4000 level in May
06. Then we see a long healthy consolidation and test of the 3000 level
with a last test at 3300
in January 07 when I wrote that article. Current
position / bias is “breakout” for the second half of 2007 - with
potential brief consolidation at this new higher 4080 level and a test of new
support (recent resistance) during June. The over sold stocks have seen
their lows in my humble opinion (IMHO), at least the risk is so low
now that it is now safe to layer in some initial positions but keep some
powder dry for near term June buying opportunity.
Gold and silver have been beaten off the mark this
year as physical shortages of Ni and price strength of zinc and copper
supported profitable mining activity. Supports profitable mining
operations - so
too does the perceived future earnings as new projects are brought on stream
in response to growing global demand for commodities. These companies are
growing Down Under and yet yields and P:E ratios remain low in some key
instances. Why? I see the nerves that this commodity boom may be over and
that China
is about to melt down as a key issue. Fear of resource stocks has led to
undervaluation which is a value investors dream. From a contrarian point of
view the low sentiment is very encouraging because if this were a top (and
not a break out as I suspect) then investor sentiment would be very high
– euphoria and greed not fear and disinterest.
Gold and silver in H2 2007
In that January article I also stated…"In
2006 the money flows have been directed at China, infrastructure development
in Asia, the general stock markets, base metals, uranium and new mine /
smelting investment amongst some other sectors. The US housing
and oil / gas bubbles popped in 2006. Gold and silver were fairly flat
after their initial rallies as they absorbed new higher price levels. Interest
rates are likely to rise in response to inflation or to attract foreign
capital flows into the US.
Alternately rates may remain fairly static at best as inflation continues to
remain hidden and economic weakness prohibits rising rates so a bond rally
would seem unlikely. The Fed remains in between a rock and a hard
place.”
And so it has come to pass. Now we get set for
some fire works in the second half and note; I should not have included oil
as a popped bubble, it is a commodity and will continue to be in
greater demand than supply can deliver.
Base metals out shone the precious metals in H1 as
expected yet I was about to move to pure precious metals stocks for my
portfolio until I did some additional analysis. I have held diverse
miners, those Down Under that mine or plan to mine base and precious
metals. I shall continue to do this and add additional weight to PM
stocks in my portfolio rather than specialize in PM plays.
Why would I do this if I expect the precious metals
to out perform the base metals in the second half? Firstly I still see
a strong outlook for base metals in H2 as demand continues to be strong. I
see continuation of tight supply conditions because it just takes so long for
new mines to get into production and the whole industry has been caught off
guard. So nickel and gold miners or developers for instance… strong
second half. Copper-silver and iron ore copper gold deposits too –
strong and I may have even underestimated our friend copper. I know Colin is
covering zinc very closely in our Weekly Newsletter and some of our elite
diversified zinc miners will be on my radar too; this is a major opportunity
because some of the zinc plays are highly undervalued.
Secondly, even though I see gold and silver being the
stronger performers in the latter part of the year I actually the base metals
have more to run during the third quarter due to seasonal issues. I
have noted a tendency in past gold rallies; investors are initially slow to
respond to price breakouts. We are nearing the end of a healthy
consolidation and most investors have now accepted the current price level of
gold.
Gold and silver short term outlook:
Here is a snippet on gold and silver from our Gold
Oz Weekly Newsletter from Colin Emery… just to finish off this weeks
article.
"Heavy central bank sales appear to have peaked
for now,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. "We expect $700 to be
revisited.''
Silver futures for July delivery rose 27 cents to
$13.74 an ounce. The percentage gain was the most since Feb. 23. The price
climbed 5.7 percent this week, the most since early December.
The metal had slid in the past six weeks. Historical price charts show
……It goes on with what a chart is meant to show what happened
– well the point of charting is to know what IS going to
happen…..and notice all the commentators out now talking about it
– well maybe if they know so much they would have been talking about it
over the past three weeks….but this is why we look at technicals as all
that was happening – and one of those facts is Central Bank activity -
is IN THE PRICE and IN ITS MOVEMENTS…and we have known
for the past weeks that using some old market clichés –
‘That there was more selling than buying” and that may have
included a major seller.…and to be honest may be nice to know so you
sound like you know what your talking about but when it comes to trading
knowing what’s happened is just that - interesting – good for
dinner party comments – good for historians but not traders. What is
going to happen is the question – We got that move spot on at GoldOz
last week and I hope you did do as I said which was – again so you
don’t have to scroll back….“Look to buy for a move to test
resistances” So let’s look at that chart again…
Over the past few weeks I have said start buying Silver at $13.20 or
lower – and that a reversal was being formed as the circled area shows.
I also last week drew the line 3 on the chart and mentioned that if that
short term downtrend triangle edge was broken we would have the confirmation
the correction was over. It was broken Tuesday last week and confirmed by
holding above it Wednesday. Then look at the strong move up to end of week to
close above the longer short term triangle edge line 2 which I also mentioned
last week. This is therefore a very strong confirmation for silver - of a
rejection of the lows. Look to buy any pullbacks to line 2 and the
supports (see below). Silver this week; to test horizontal resistance line 9
which is meeting the lower of my two upper long term triangle lines – 8
at around 13.80. If broken the upper line 7 (note I’m using the same
chart numbers as last week so you can flick back) up at 14.47 (14.60 last
week) and moving lower. Note though the RSI has had a big leap – so we
can expect some consolidation at these levels first.
Much more for subscribers, all metals and some key resource stocks
weekly. We have automated our new secure store at Gold Oz so any potential
clients that did not like the old system can go in now and take up the
remaining positions of the Newsletter discount offering. Annual subscription
only AUD$250, for a little longer, less than 50 discount positions remain on
our introductory offer. Colin really is an elite trader and you will learn a
great deal while you make profits from our resource stocks. As I have said
before you don’t get to the level Colin traded or worked at without
knowing the investment trade to a high degree and you don’t stay there
for 15 years either.
Knowledge is power – also get the PDF set for a broad range of
310 companies Down Under, get the data you need to make awesome investment
decisions for the second half of 2007 – annual subscription is just
AUD$99. Go to www.goldoz.com.au,
new data on investment education is added weekly.
Good trading /
investing.
Regards,
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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