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Gold and silver are currently cheap by several
separate definitions; this will soon affect demand to a greater degree and
very shortly. Before I get to these reasons let me point out that this
is a very current statement not just re-hashed commentary – the time is
right for a break out for many reasons now. This is likely to be slow
at first and to gradually build over the next few months.
One must also consider the time factor and investor
sentiment because these two metals have been trading at these higher levels
since the end of April 2006 and the market has simply adjusted expectations
to these levels and above. These are the new base valuations of the
precious metals in my humble opinion. There are many investment
ramifications.
Relative valuation
Definition 1 –
Relative valuation: Firstly, after the heavy falls on the USD, gold
& silver have dropped back considerably against most of the global
currencies since the beginning of January 2007. For instance gold hit
$AUD930 in May 2006 and it now sits at $AUD765 – not important news for
most of the world however we are the 3rd largest producer of gold and silver
last time I looked. The divergence between the price of gold in the two
currencies is clear in the chart below, look at the picture since the
beginning of this year. Less volatile, settled at a higher plateau and
relatively cheap in AUD at present. This picture is duplicated in
several currencies.
The same story applies for the Canadian dollar – I have chosen
these two currencies because they are both low sovereign risk nations that
are key global producers outside the USA. I invite you to go to
the charts found in the exchange rate section of the Kitco main page.
Forget the Yen as it has also been devalued via massive monetary creation and
is therefore distorted. The Pound / Euro are important however, 600++
million potential investors - and India
is in exactly the same boat as Australia – check the Rupee
chart! Both of these are key investment sources for the precious metals
and the price of gold has dropped compared to the USD in relative
terms. Then you have the Middle East and China – not as pronounced
due to their currency management policies however there is some divergence;
as these respective currencies appreciate against the USD.
Speaking of the US Dollar I saw an interesting development forming
6-8 weeks ago and there is clear danger of this coming to pass in the short
term now so I urge you to take a look at this past essay in review - just in
case you are one of the millions watching and planning to trade a down side
break. http://www.kitco.com/ind/charnock/may072007.html
Monetary inflation –
rampant
My next point is the level of currency creation that has occurred
since that May 2006 which has been well covered by some of my colleagues on
these sites – lets just round the number off at 10% - that could be
factored as a further discount to the current precious metal prices in terms of current money supply.
This would take the current value back about 10% in mid 2006 $US terms
indicating a current price of gold is equivalent to around $US600 – not
necessarily realistic as a useful benchmark - however it is an interesting
exercise to monitor the deterioration of the Greenback and other fiat
currencies in terms of gold.
Risk – Reward
Now in terms of risk – once again we are sitting at cheap levels
in relative terms – now the precious metal prices have stabilized at
these levels for over 14 months the risk to the down side is
diminishing… despite the bearish sentiment and flood of additional
supply the prices have held. If down side risk is low then the upside
potential must, by inference, be high. Some may wish to wait for the
break out to continue for confirmation and nothing is certain in investing so
this is another way to manage risk. Speaking of low risk to the
down side - we are also very close to the 300 day moving average which held
again in June.
Many short term traders who are adept and quick on their feet are on
top of this trading opportunity already. My portfolio is up
strongly since the beginning of July as the ASX stocks are in excellent
condition – we do not have the same seasonal break for summer over here
as this is our winter. The sun is shining out in the deserts of WA in
more ways than one though.
Since the Australian currency has appreciated from US77c to US87c
since March 07 (and up from 70c in Mar 2006) there may be some currency risk
for US investors in the ASX now. That is if share price gains do not
offset a bounce off the current level of the USD – but note - a word of
caution. The AUD could continue higher short term however it is looking
a little overbought on the RSI and the MACD is rounding over as if it might
be ready for a correction of some kind. The overhead resistance for the
AUD is at about $US
89.7c. Of course the USD may cut down through the 80 level however this
has held for a long time and there is likely to be considerable support down
here. Euro, UK, SA, Canadian and other strong
currency investors need not worry about this current risk factor in the ASX.
Then there is the issue of Sovereign risk – how many times have
I heard about country risk being an issue and given socio-economic and
political trends in many parts of this globe you can expect further
trouble. I am very careful about this issue when investing - where
companies operate - with my precious capital and tend to keep only small
speculative positions in higher risk areas. Canada
and Australia, which is
less understood in the US
and around the world, are leading mining Nations with very low sovereign risk
ratings so they are ideal for investment in this regard.
Time
Now in terms of time – this point in time, right now, reminds
me of July 2003, and 2005 – near an end point of a long
consolidation. If you pull a weekly gold chart and look at the overall
pattern from July 2005 to the end of June 2007 it looks almost identical to
the time period from July 04 to July 05. These patterns of strong rises
followed by longer consolidations are a feature of gold’s weekly chart
and it looks like we are at the end point of the correction right about
now. One of my favorite analysts Adam Hamilton just released an
excellent essay on seasonal factors and this should be read by all investors
– his essay is also relevant to this time factor.
ASX Resource Stocks
Selective investment and patience are key strategies now. These
Aussie Resource stocks are mixed and likely to stay that way for a few weeks
at least yet. When I say mixed – this has been pronounced, some
of our larger cap plays have been awesome – especially the large cap
and low PE – those diversified producers. I have just gone
through a PDF chart set (that I send to subscribers) of my spreadsheet
product and the technical picture is still mixed too.
I could not yet recommend a general breakout in prices at this
stage so the strategy is still, buy the dips and pick carefully as Colin
Emery keeps on saying. Colin did warn our Newsletter subscribers, only
last week that a short term correction in our S&P 300 Metals and Mining
Index was likely and that it was most likely to affect the big cap plays
– and this is coming to pass right now. This is time to buy the
dips for the next round of profits if I am right – keeps stops close
though – at least until we get clearer break out confirmations in these
markets.
Timing this sector is tricky at times however some stocks appear ripe
for significant movement in the short term – others still have some
more to fall before their inevitable turning points. There have been
some unusually large orders on the mid and smaller cap producers and
developers – and also some very strong price movements on explorers
leading me to compare this behavior to mid 2003 and mid 2005. That
behavior preceded a magnificent general resource rally in each instance.
As always - a good knowledge of the sector is essential so that you
have a good range of quality stocks in your watch list from which to
choose. I have deployed trading capital into an oversold play during
June and sold into the 30% rally that followed only to reinvest the funds
into a range of different stocks – some that have obviously finished
their bottoming process and await a breakout. This is a low risk play.
One last point here – as the coming / present rally really
kicks into gear, and moves out of this preliminary phase, it will usually be
the larger stocks that break first. I am talking about the group in the
AUD$100M + category – but you would need to include special situations
that can be identified by their technical setup. A good knowledge of
charting and technical analysis is required for this – even some back
up advice from a mining / charting expert like my Gold Oz Weekly Newsletter
contributor Colin Emery. I have
recently added a Newsletter accuracy page to www.goldoz.com.au in order to highlight Colin’s skills.
If I am wrong about the intensity of the initial part of the rally
and your risk profile allows – there may be a situation like 2003 in force… one
by one the speculative juniors & mid tier stocks jumped and rallied
hard. I see this at present in the current market and wonder if it will
continue. Most of the PM and Resource complex rallied in excellent
fashion that year and anything is possible. But we are concerned with
probable - so prudence is the wiser move – perhaps some speculative
money in the smaller caps if you are careful and experienced enough.
The New Spin to expect
As the price of gold continues to rise - the spin machine of the
CB’s and in the media will hose down the importance of gold as an
indicator of inflation. This is just an interesting theory but it would
make sense – when they can no longer manage the price with monetary
policy they will go on the big spin sell. I can hear the pitch coming
already – gold has nothing to do with money these days because it no
longer backs the system so the old “inflation indicator” theory
does not work anymore.
The price will work its way higher and some sort of soothing message
will surface and be pumped into the already confused minds of the monetarily
uneducated masses, such that even a post $1000 gold price will be explained
away. Perhaps they don’t even have to after all - look at the 10
fold increase (approx) in house prices since 1980. Perhaps they can
bring up a house price: gold price ratio for
the past 25 years – that would make a convincing argument for any gold
price rise looking tame!
We are still running a top value introductory discount special on the
new GoldOz Weekly Newsletter at this time and the response has continued to
be excellent – we intended to run this for the first few 2-3 months and
details are on our web site at www.goldoz.com.au
. We now post this announcement that this limited offer is coming to a
close in the next few weeks. The details about the Newsletter author
Colin Emery are directly below my signature and before my disclaimer.
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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