News
just to hand informs me that Spain is just about to do a “Greece”
as their banking system is without funding. In the end this is not
about maintaining global growth or the European Union it is about the
survival of the financial system as we know it during this major historic
transition. Gold is about to go through the roof and not just in Euro
terms.
This
is also a de-leveraging environment meaning that there is a scramble once
again to sell assets and raise capital and gold stocks are temporarily caught
in this downdraft. This is the most opportune distortion of fundamental value
I have seen since the end of 2008.
The
number of highly significant influences and potential disruptions is
staggering during this period. These factors will all effect gold,
currencies and gold stocks; therefore we need to keep on top of all this to
be successful in our investing activities. This is the missing analysis
from most simplified gold stock investment tools and models. This is a
world of specialization yet one needs to be an all rounder to really flourish
in this environment.
We
will be moving the more advanced analysis of this nature into a newsletter
that will form part of our Gold Membership subscription service as soon as we
can. GoldOz is also in a transition due to political proposals afoot in
Australia. We will continue to provide useful free snippets and
international gold and gold stock coverage in these types of articles for the
visitors of this web site.
History
does repeat to some degree however the goal posts as influenced by cross
currents, policy decisions and the timing of fat tail events present
challenge to market participants. The age old axiom of investing is buy
low and sell high. This is made more difficult by changing conditions,
extreme movements and distortions at this point in time.
One
old model used by all global funds and institutions is now broken. This
was the concept of the ‘zero risk’ investment for Government
debt. Even this is now broken as evidenced by the recent dip in
interest rates on some corporate bonds to below the going US 10 year treasury
rate. Some of our biggest companies were rated as a lower risk than the
US Government. Do not underestimate the significance of this event as
it points to further disruption and trouble ahead.
Required
Understanding
The
first thing to understand about this cusp area in the worlds economic history
is the balance between the established economies of Japan, Europe and the USA
compared to the emerging economies of China, India and Brazil. Although
it is estimated that at least a decade remains until the new
‘normality’ equilibrium is reached the effects are already very
powerful economic drivers.
This
is the area of hope for the world economy and it will continue to emerge and
evolve. The growth in these economies has surprised many pundits both
before and since the events of 2008. These areas will continue to see
greater capital flows and higher living standards. They are likely to
manage the developmental risks and challenges as we move forward and this will
continue to influence Canada, Australia and Africa as resource supply
giants.
The
second factor to get straight is the unwinding of the massive debt load in
the mature economies. Balance sheet repair is a subject I have been
harping on about for a long time now but it goes much deeper. This debt
load is carried at Sovereign, State, corporate, small business and personal
levels. This influence will be responsible for the most significant
changes in policy, growth expectations and living standards we have seen in
over 100 years for the established economies. This risk is what our
investor clients are avoiding through gold investments.
This
is long cycle change which is why so many investors are going to be caught
unprepared. These people are looking back at the past ten to thirty
years to explain current events without realizing the true significance of
the current events.
This
de-leveraging phase will cause muted growth in the mature economies for far
longer than most investors and policy makers realize. Cost of capital
is going up as sovereign default concerns push higher risk weighting by major
investors. The de-leveraging will take a long time and have to be
managed as it will constrain the availability of loan capital. Crowding
out will continue as SME’s and Governments, corporations and
individuals line up for new debt.
Unwinding
of debt and de-leveraging will at times get disorderly. This can be
exacerbated by policy change at times and we face such a time at present in
Europe. We currently await the implementation guidelines for such a
mega change in the proposed de-merger of the proprietary trading arms of the
US banks. As usual the devil may be hiding in the detail or alternately
the Obama administration may find the softest possible implementation
strategy thereby managing the risk of blowing up the extremely fragile
recovery.
Some
disorderly economic or even climatic events will be out of the
“normal” probability curve; these are referred to as “fat
tail” events. Debt which cannot be repaid will have to be
monetised which must result in inflation eventually. The search is on
for a clean balance sheet that this debt can be shifted to. By default
this becomes a search for the least tainted balance sheet as in the example
of Germany and the ECB at present.
Gold
& Gold Stock Analysis
The
fat tail events and distortions are of most interest to gold investors
because this is where we will derive and amplify our profits before serious
inflation sets in. Take the plunge in the Euro against the USD for
instance and the effect this has produced on the Euro price of gold.
European gold investors had been left out of gold price rises during times of
strength in the Euro but that all came to a sudden end once the local problems
really started to bite.
The
same opportunity will be realized in each country in turn which will switch
new investors into gold. This was mainly a US phenomenon during the
early stages of the gold bull, back when the USD had to come down from
extreme highs like what we have recently seen for the Euro and the Australian
dollar.
Here
is look at the effect on the Euro gold price and how well gold acted as a
hedge for Europeans during the past six months.
As
you see six months ago the two scales on either side of the chart above
matched in terms of the price of gold at about 800 Euro and US$1200. This
is where the axis were set of course but the point is that gold has not moved
in USD terms however it has risen as much as 25% in Euro terms. The
recent 1000 point plunge on the Dow is another example of the kind of
distortion I refer to.
We
have been warning that the AUD would fall and this process has begun as the
AUD carry trade unwinds. This is a massively positive distortion for
the local price of gold and a powerful influence on the local gold
stocks. However the gold stocks are presently weak heading into the
last week of May and June as we said they would be.
This
is due to de-leveraging and some hang over from Rudd’s Unworkable Super
Tax (RUST). There is nothing further to comment on in regard to this
proposed tax because the detail is not yet formulated. I am not making
a political comment or taking sides here. The current Federal
Government has to get re-elected first as well and they have lost a lot of
friends in Queensland and Western Australia just for starters.
It is
interesting to note the distortions of the AUD: USD ratio and the effect on
the AUD gold price because this has been an important medium term influence
on our gold stocks.
As
you see above the gold rally in both currencies moved in lock step until
about April 2007 when currency gyrations began to become more extreme.
The relatively poor gold stock behaviour in Australia was obviously influenced
by the rise in the AUD which depressed the rise of the locally priced
metal. Higher interest rates in Australia had set up ideal conditions
for a carry trade creating additional demand for AUD driving it higher.
Because we are now heading in the other direction at present it is worth
looking at what happened when the AUD fell in the past.
At
the end of 2008 the Australian gold stocks made one of their best moves for
the entire gold bull to date accompanied by that spike you see for the AUD
gold price to nearly $1600 per ounce. This was on a significant fall on
the AUD as we are currently seeing. The large gold producers that
quadrupled from panic lows in late 2008 did so very quickly because they were
wildly profitable at that time. Many of the leading producers have flat
lined into a large trading range ever since due to the recent carry trade and
ever rising AUD to the 94c level against the USD.
The
AUD is currently under US81c as I write this article and the AUD gold price
is over $1,470 even with the fall in USD terms. This is once again
wildly profitable for our gold miners. Here is the strategy for our
offshore investors.
The
AUD still has some down side however this is diminishing thanks to
deterioration in global economic conditions. This has taken the
pressure off our prime rate as the RBA may not have to raise rates more to
curb housing prices. Retail is weak and domestic mortgage rates are set
to rise even without the RBA moving a muscle. This is because the vacuum
created by the exit of the carry trade has removed billions of dollars from
the local banking system. The local banks now have to go offshore and
bid for more expensive capital for an estimated 50% of their lending
requirements.
As we
have been warning, and the news on Spain will only increase this problem, the
COST OF CAPITAL is rising. This makes our debt analysis on the local
gold stocks more important than ever and we will be increasing the focus on
this soon. Zero debt and low gearing are becoming more and more
attractive.
Heightened
risk factoring and the remainder of the unwinding of the carry trade will
send the AUD down further making a truly exciting entry point for foreign
capital some time soon. If this capital were to find a home in our
cheap emerging and established gold producers sector it would set up the best
investment opportunity I have seen since October and November 2008.
Cheap dollar and cheap oversold gold stocks; it does not get any better than
this. It is very close to the perfect time to start layering your gold
stock trades Down Under.
When
these gold stocks next peak you should be able to take a currency profit and
a share investment profit if you get this end of it right. As a
contrarian I am now extremely excited about these stocks. I have
deployed approximately 30% of my own share investing capital at this
stage.
We
have just completed our latest version 8 rating table file and included the
proportion of onshore production. There is unique analysis provided to
make sense of gold stock valuations and tables with all the essential data on
the producers. This is available to Gold Members at our site and I hope
to see you there so we can assist you if you are interested in this
opportunity.
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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