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At present more people are concerned about timing and the
current gold correction. In historic terms you are on the right track
with gold. This is the right time to be involved in and hedged with
gold. You may even generate wealth via gold stock investment over the
coming years – a high probability if you get it right. As I point
out in this issue it is possible to be right and still lose money so your
attention and diligence are required. Last issue I showed what was
possible on timing the XGD and gold short term as we keep an eye on the
correction – in search for signs we are near the bottom.
I called a bounce and it may even be the start of a
consolidation / turn signal. It is too early to tell which. Gold
did respect the 300 day moving average (dma) on almost all occasions prior to
the unprecedented stock and asset collapse of 2008. That period was
marred by an extreme set of circumstances not faced at present. That
was a time when credit froze across the world; banks stopped lending to each
other and to clients.
The Fed had to step in and provide liquidity on a global scale
including two of the Australian banks that suffered a funding crisis.
This is all history however it is important to note the exceptional
circumstances that drove investors to sell onto anything with a bid –
anything at all to raise capital. This was the circumstance that drove
gold stocks to unheard of lows and it drove gold down to under US$700 and
well below the 600 dma. Therefore this was a statistical anomaly
– not usual – can be deleted from current analysis.
Spot
Gold - 5 Year Weekly
 
The normal pattern during gold corrections is for gold to drop
back to just under its 200 dma. I have marked the 200 dma in black and
also circled the ends of corrections that respected the 200 dma in this
chart. You will also note some instances where the Price of Gold (POG)
dipped below this 200 dma during the normal course of this gold bull.
The two black horizontal lines mark the top of consolidation phases.
The massive statistical anomaly I talk of above – during
the second half of 2008 formed a false low all the way down to the 2006 high
area at around US$700. The dip area under the second black horizontal
line is normal down to just below the 200 dma. However the dip deep
below that area of the 200 dma was a false low.
The current rally therefore began its true course on the break
above the second horizontal black line not at US$700. The POG
broke above that level at $1000 and only went up about 43% to the recent
highs at $1430. This means the latest rally was nothing
exceptional. The last up-leg ran from the break above the first
horizontal black line, from $700 to about $1000 which was also a 43%
rally.
And so we start another consolidation phase unless fundamental
factors in the debt markets (read sovereign debt default) over-ride the
technical situation. Fact is that the authorities still need to buy
time and will jaw-bone and QE to our detriment to save the economic system
from an even worse outcome.
I still believe that capital flows will head towards equities
with yield and gold stocks. Gold stocks may start to outperform
gold during this POG consolidation phase. Some stocks are overbought
because they have operational issues – after a strong sustained price
run. They will do worse and are falling heavily. Others are
highly undervalued because they have not run up in price – and are
getting their operational act together nicely. Some of these are being
sold off by confused traders and investors.
Because of the shape of this recent POG top, and based on
seasonal factors, I held out hope that there was more in this rally.
The gold stock behaviour also indicated something is different now.
With the benefit of hindsight I still believe we have entered the early
stages of something special for gold stocks. This correction may not
pan out for gold stocks like other POG consolidation patterns mapped out over
the past 10 years. It is over to the fundamentals and technicals of the
individual stocks from here to see which ones will diverge.
XGD 12 month daily chart: (Here is the XGD
– the Australian gold index)
…Now we wait to see if this type of pattern can form on the daily
chart to confirm the bullish weekly hammer formation. If this
eventuates then gold runs back up possibly to $1400.
Current Newsletter Issue No. 25 February 15th extract:
The current action in the gold stocks reminds me of the time
period in early 2005 when stocks would start strong every day and then weaken
off. It was a great time to sell on the open and buy back at lunch time
or the end of the day. This stock behaviour eventually gave way to a
sea of green as stocks streaked upwards.
More importantly it was a time that preceded a massive and
general gold stock rally which lasted into May 2006. The rally
eventually ended as stocks sold off over April and May 2006 as gold made its
final highs around US$730. Massive profits were made at the time by
gold bugs who knew how to exploit the opportunity.
Right now the Australian gold sector is extremely
interesting. Although the XGD is not actually moving up at present many
of the smaller stocks are doing very well. Obviously the heavily
weighted XGD is biased toward the big cap stocks and in particular NCM.
The broader gold stock complex is mixed with several emerging producers and
smaller stocks making large gains. I have included the GoldOz /
Sharelynx gold sector charts instead so that you can actually see what is
happening on average with the different sub-sections of this Aussie gold
sector.
Here is a chart of the larger stocks without NCM’s
influence and the picture is quite different. Here we see a gradual
uptrend and not such a pronounced correction. This index just bounced
nicely off its 200 dma and is trending up nicely.Now to the other sub-sectors
and you will see an even better picture.
Just feast your eyes on the emerging producers and you will note
they have hardly retreated this year at all. This is a strong
accumulation pattern in my opinion. The juniors have done much better
than the bigger stocks but not as well as the emerging producers.
There is no wonder that the index above is doing so well –
production is growing for almost all stocks. Debt is being paid back,
hedges are being cleared and new projects are taking shape. There are
many Aussie gold companies that are booming and all credit to them as this
has taken years of dedication and expertise to achieve.
This stock behaviour is not at all consistent with a weak gold
sector. If we were at a top of any description the emerging producers
would not be in that strong uptrend and the juniors would be falling like
rocks. We are in for a great ride this year. It is impossible to
tell exactly when or how this will transpire except to say it is happening on
a case by case basis.
Much more for subscribers…
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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