A bellwether is any entity that serves to create or
influence trends or to indicate future events. In this essay I present
an expanded excerpt from Newsletter No. 29 published in our Gold Members area
on the 6th April. This followed the analysis we presented
back on March 16th in No. 27 that suggested Australian gold stocks
were testing important support and we were buying heavily in our educational
portfolio the day before. We have been showing our subscribers how to
systematically pick off the buy opportunities using technical and fundamental
analysis during the course of this consolidation period.
On March 24th in No. 28 I stated this: I have marked
two ellipses, one on price which shows the bounce off support (confirms it
once for now), and the one on the MACD showing a potential cross over. If
it does cross over, and price breaks above the moving average which it is
currently nudging, we will run up to at least near the top Bollinger Band
short-term. This is exactly what happened. (Chart omitted
from this public essay.)
Despite wide spread nerves and some negative market commentary
out there we held our nerve and are comfortably ahead on our investments as a
result. We also called the gold break out precisely in No. 28 and had
mentioned this would happen shortly in a very recent public essay.
This pull back in gold is just a pause and another buy opportunity for the gold
stocks. I will cover my reasons for this statement after some
brief excerpts which provide our views and track record.
April 6th No 29 analysis excerpt
Newcrest may be leading the way to start the next up-leg of the
Australian gold sector. This is a classic signal and I give it to
you all first – perhaps I highlight this in a week or so as promotion
to the general public.
NCM has printed a massive buy signal and here it is: (chart for
members only)
This is the daily chart on NCM for the past year. I have
marked two key divergences that have marked the two turning points for the
past several months. This is the reversal and it is a high probability that
this is the beginning of the next Australian gold stock rally.
I have been looking, and reading and searching for a signal like
this for over a week. I have visually lined up the NCM weekly 5
year chart with the Gold Producers Index 5 year chart (only second chart
shown). I have done this to test the NCM signal as a measure for the
entire gold stock complex here in Australia. If correct then this is of
extremely high value to investors in this sector.
The area with the least agreement with this theory was at the
far left of the charts around A. Obviously the stocks that make up this
index were more volatile back then as there was a pronounced high before A
and a lower low after A. After that the correlation was striking
– B was a major sell signal for NCM and the index, C was the turn point
at the end of October 2008 for both.
NCM led the way up out of that panic crash in late 2008 along
with the other large gold stocks. As I said though – NCM printed
a buy signal and then turned up leading the whole index ahead of that rise.
NCM then consolidated without a sell signal in 2009 which was
interesting. No sell signal and no meaningful correction either.
It printed another weaker buy signal at D (subscribers only).
E was a sell signal for NCM and this led the index down a few
months back, F has now marked a fresh buy signal. Remember that this
index is not weighted. Therefore the size of the market cap of NCM
would not influence it like the XGD. In fact NCM is not even in the
Gold Producers Index as shown here.
Therefore the index more accurately represents the whole sector;
we are not comparing apples to apples and arriving at another apple
here. My theory therefore has some credibility when you go back over
the past 4 years at least – NCM leads the way and NCM just printed a
nice strong buy signal. The bottom chart (shown) is more volatile
because of the smaller stocks in this index – the opposite is also true
NCM is more stable.
NCM is the premier gold stock on the Australian exchange.
My theory is simple and yet I have not seen it anywhere else. It
looks to me that a buy signal or sell signal on NCM is a fairly reliable
indicator for the Australian gold sector. On this basis I am going to
layer in more investments with added confidence for the GoldOz Educational
Portfolio.
General bullishness on gold stocks
Gold is a safe haven and it attracts and deserves a considerable
value when times get rough. My theory is that this is not currently
factored into gold at current prices but why would I think or say that?
This is a slow motion train wreck, a debt collapse and these happen over
time. Even though gold bugs know the train has left the tracks the
general public do not. A shift is happening however.
Gold rose from $34 to $850 throughout the 70’s however
this rise was a little more modest after inflation is factored in. Gold
may have been up as much as 1400% after this adjustment to the top in
1980. Gold is only up about 480% (up $1200 from $250) from the 2001 low
at the moment with no inflation adjustment. Price inflation has been
significant during this period on oil, food and general commodities.
Money supply inflation has been dramatic, unprecedented by historical standards
since 2001.
Gold is only up 70% from the 1980 peak 31 years ago. By
these metrics gold is still very cheap, especially when you consider the risk
in the debt markets and level of currency debasement out there.
Houses were $30k in the Eastern suburbs of Melbourne in the late
70’s and peaked at $600k to $700k in the past two years. This is
a rise of 20x or 2000% even at the lower valuation figure of
$600k. That is a bubble. Federal debt has risen 2000% from
$700B to $14T since 1980; this is also a (debt) bubble – the largest in
history.
When the money eventually comes out of the short end of the bond
market (gradually on maturity) it will look for a safe haven. This is
risk adverse capital meaning it seeks safety above yield. That has to
include gold. It also creates a flood of liquidity as the debt markets
contract – loans are harder to get you have to be on the A list.
The B list misses out and the money left over after bond holders take a
haircut floods the economy creating inflationary pressure.
Unfortunately many people will miss out on the gold lifeboat
because it has gone up in price. The same thing applies to gold stocks
and even many gold bugs are in danger of missing quality stocks because; they
have gone up they get overlooked. This makes them less attractive to
the less informed. We have been there since the beginning so they
already look dear to us in some cases. The shift I mentioned a few
paragraphs back is set to push gold much higher. This completely
changes the fundamentals for the gold miners.
The best news of all
You have not missed out on the highest leverage opportunities
from this ride if you are new to the Bull Run in gold. Some investors
are alarmed that they have not made their fortunes out of the gold stocks to
date. There is a fundamental reason for the fluctuating fortunes of this gold
sector in the past, apart from the gold price.
Because of the rising cost of gold mining over the past 20 years
the companies involved are currently making, in a relative sense, little
money considering the rising price of gold. Sure there are the larger
producers and the low cost special producers and they have been the stellar
performers so far. There have also been some decent sized discoveries
and a great deal of organic growth in the better stocks that we have
covered. They have been the early movers and have so much further to
go.
In comparison gold and the ETF’s have done really well and
are currently recognized as a major limitation to the cash flowing
into gold stocks. Physical gold and silver have also outpaced many gold
stocks. This new phase should change this situation.
In my view many of the gold stocks have not been that attractive
in this early stage of the gold bull precisely due to the high cost of modern
gold production. Royalties, energy, rehabilitation, sterilization
drilling, the cost of exploration, deeper mining and all sorts of
environmental considerations have rightly pushed up the cost to an average of
over $900 per ounce for newer mines of modest scale. The problem is
that large discoveries are getting few and far between. This pushes up
that average cost of production with a larger and larger majority of
production coming from smaller and smaller deposits. After
administration costs and debt repayment are removed this has not left a huge
amount of profit for most of the gold miners.
In this next phase shoots up significantly above average current
cash cost levels. The costs might continue to rise for energy however
the exposure of gold miners as a component of overall cash cost is nowhere as
severe as the long term cost rises we have seen since 1980. I expect
the bond crisis to escalate at this point in time as the debt implosion
starts to accelerate. This will increase currency debasement and
uncertainty. The rising interest rates will gradually increase the
pressure on bonds as they have in parts of Europe.
If I am right on my timing, selected Australian gold stocks will
begin a new phase of accelerated price rises just as gold did in September
2005. That is when gold cleared US$455 per ounce. The lag caused
by cost pressures on the miners will soon be over once gold clears the $1500
- $1600 range. At $2000 per ounce these miners will be making massive
profits. The marginal higher cost un-hedged miners will benefit greatly
as they are the most leveraged to gold. Take advantage of our current
special on Gold Membership if you are interested in our leading research and
education.
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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