Australian
gold stocks do not generally move up or down as a group in sequence. This
presents both opportunity and an additional challenge for investors in this
sector. To further complicate this dynamic the price of gold does not
necessarily dictate the short term price movements in gold stocks. At times
gold leads the stocks up and down - gold stocks can also lead the way.
The
great news is that there are always attractive gold stock investments in
motion that are capable of generating capital growth. Before I look at some
of the key drivers I suggest that all investors need to be aware of monetary
history and long term cycle waves. Anybody that bases their investment
decisions on minor pull backs since 1930 is going to come unstuck. Forget
about; 1974, 1982, 1987, 1992, the Asian crisis, 2000, the 2008 crisis or any
other minor (?) hiccup since 1930 as you formulate your investment strategy
for the next ten or even twenty years.
This
is a long cycle wave, a multigenerational change. This is a debt bubble twice
the magnitude of 1930. Without this key factor plugged into your investment
models you cannot get an appropriate investment strategy. I guess I am mostly
'preaching' to the converted, those willing to look at the situation and or
fortunate enough to listen.
Many
will not look until it hits them square on and then they will claim they did
not see it coming - which will be sad but true. This crisis has been
unfolding over the past ten years and has not been resolved as this second
group have been told. The fundamental flaws are still there, even if time has
been bought, the debt bubble is even larger now. The problems are obvious to
trained observers however, thanks to masterful spin, smoke and mirrors the
general public still has no real idea about the magnitude of what we face. As
a result they take risks with asset classes they assume are safe and sound.
Many wrong assumptions are being made based on the minor pull backs over the
past 80 years.
To
briefly illustrate my point consider the bond markets. We have recently seen
rising yields (interest rates) because of increased risk and due to major
bond funds are withdrawing from the markets due to risk (e.g. Pimco). Bond
investors are demanding higher returns; yields are not rising due to bullish
economic conditions. The European Central Bank (ECB) is currently the buyer
of last resort providing a secondary market for sovereign bonds that might not
otherwise be bought at all. In other words many bond funds and bond investors
would not buy this debt at auction if the ECB were not providing a guaranteed
exit for this high yield investment class.
Euro
nations created the European Financial Stability Facility (EFSF) on the 9th
May 2010 for three years in response to crisis in Greece and Ireland. The
facility became fully operational on August 4th 2010. The ECB were hoping the
EFSF would step up and agree to assist with secondary market bond purchases at
a meeting on Friday and were disappointed. This is not a good sign or
indicator of things to come. Are these sovereign states closer to default now
or has the threat receded? If you look to the news you will discover that
nothing has changed except time itself. The problem has not gone away. In the
event of a sovereign default gold will go through the roof.
Massive
Central Bank bailouts and "unusual measures" are in place to
prolong the inevitable so that time can be bought. This is still a banking
problem. The strong are positioning themselves and the authorities are
desperately trying to put some measures in place to rectify the situation.
Default and restructure are inevitable - gold is going to go through the roof
and we will see a massive gold stock rally as earnings soar in the sector.
The
social and economic shock waves are already beginning; ignore them at your
own peril. Unfortunately most people also underestimate contagion across
economic regions and asset classes. This is understandable because we have
not seen economic conditions like this in nearly 100 years. Interest rates
have to rise and asset prices have to fall. This is the new normal; poor
economic growth, upheaval, regulatory restructure and debt default - followed
by a long economic rebuild.
So why
gold? Never before has the financial sector taken such a disproportionate
share of total business activity. Complex financial instruments and games
have put the real economy at great risk. The real economy encompasses supply
and demand of goods and services, manufacture of goods and supply of
services, both to match consumption. The financial sector and money itself
were originally intended and designed to facilitate trade and commerce. It
was never supposed to be a means to itself to this degree. Yet this has gone
on long enough for the average person to consider it all normal. The driver
of this obscene and dangerous game was debt. Debt and the financial system
got out of control, they are bubbles and you know how bubbles end don't you?
As this
monolith implodes and unwinds asset prices will fall, fortunes will be made
and lost, interest rates will rise and most people will suffer.
This
change is actually, already an established trend where the shocks come in
waves. They are causing gold and silver to rise and rise. This is not over by
a long shot it is just getting started. These issues I write about here are
the macroeconomic drivers of the gold bull market and ultimately gold stocks.
All the authorities can really do is to rearrange the deck chairs on the
Titanic. On the other side of this period in history we will find a greater
equilibrium across the global economic system. Now the trick is to protect
yourself through the transition phase, hopefully to benefit.
The
key price driver for share price upside is liquidity. This liquidity is money
flow directed at any given company or sector. It is about buying pressure
which overwhelms sellers forcing the share price higher. Buyers need a reason
to abandon their natural conservatism and commit funds to any investment.
Once they realize gold, silver and gold stocks are one of the few safe havens
left they will jump aboard.
Many
will jump to cash and lose money gradually as inflation eats away at real
returns. Inflation will remain higher than interest rates offered by banks,
perhaps throughout the whole crisis because they are rebuilding their balance
sheets.
Many
favourite asset classes over the past decades will decline - those that
depend on credit for purchase in particular. Investors don't weight credit
supply in their over simplified shorter term views on real estate for
example. You can have all the demand you want but if the banks are overweight
domestic property loans and risk is increased due to softer economic
conditions, along with a rising cost of capital you soon see property prices
cannot remain high. This is simply because borrowers that qualify are fewer
and the amount they can borrow is reduced. So they have to pay less.
The
situations I describe in the bond market are dire. We face a long term upward
trend in interest rates so investors will continue to exit as best they can.
The money has to be invested elsewhere but the question is where do they go?
We cover this in depth in the GoldOz newsletters. Sovereign defaults and
corporate bankruptcies will cause continued fear and currency instability.
This is one of the reasons the Central Banks have become net buyers after
many years on the opposite side of the ledger. The outlook for gold is
changing across the savvy end of the investment spectrum and this will drive
gold and the stocks ever higher at some point.
All
this money creation, the quantitative easing as we call it, creates
inflation. The genie is out of the bottle look at food prices. Gold thrives
in this type of environment. The gold market is small so if you think we have
seen all the upside think again. As investment and even sovereign funds take
a position prices will soar due to the weight of funds entering this small
market. Massive amounts of capital compared to its limited size.
A
rapidly appreciating gold price can affect many gold stocks at this same time
pushing them higher. Fail to do enough homework and you can miss out on gains
by buying the wrong stocks. I have generally found that scientific analysis
methods work poorly. Measure Enterprise Value and large deposits without
greater understanding and you can still end up with underperformers. The
numbers don't tell the story they are only part of the story. Buying the
cheapest stock can be the worst decision you could possibly make because
investors may have been selling it off for all the right reasons.
Liquidity
will flow towards stocks that are making progress towards larger deposits,
higher earnings, higher production, significant balance sheet improvements or
growth through acquisition. It can flow even in negative macroeconomic phases
where gold is correcting or consolidating at a given level. Stocks that have
been underestimated and undergo such change present the greatest opportunity
for capital growth - these are the "five baggers" or better that
can multiply your money fivefold in a relatively short space of time.
Consider
how long it would take for money in the bank to double. There is still low
hanging fruit in this gold sector it is just harder to find. Significant
undervaluation can and does exits and persist over prolonged periods
confounding many investors. Only comprehensive work will alert you to the
opportunities so the bad news is that it is hard work to achieve stellar gains.
Only research that combines undervaluation analysis with experience and then
times the entry with heed to internal progress or macro analysis can earn you
the gains you seek from this sector.
We are
releasing a special GoldOz report to educate investors this week. This also
corresponds with a special discount offer on 3, 6 and 12 month Gold
Membership at GoldOz if anybody is interested just visit our store page for
details. Dips like the current one we are experiencing in the gold stocks are
fantastic buy opportunities.
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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