Introduction
Gold
reached US$1248.20 which was a new record high in USD. Silver has also
followed gold up, this rally looks like the real thing. I have to stand corrected
here as I was off the mark a little in some recent statements. I forecast
US$1180 as an interim top and it only reached $1170 before pulling back to
the $1140 level. I had also thought we would have pulled back for
longer and that this rally would be a false break out. So much for short term
forecasting it is extremely difficult. This short term forecast turned
out wrong thanks to one trillion more reasons potentially circulating in
Europe.
The
European rescue package is not a done deal as there are all kinds of caveats
to clear first. Markets have appeared unconvinced this will either happen or
actually help at all in the longer term. Economic rules that control
inflation are out the window and confidence in the Euro is hitting very low
levels providing a powerful uplift to gold. There is talk of the weaker
nations being evicted from the Euro and talk of the stronger ones leaving to
save their own hide. None of this is good for confidence in European economic
output or the currency. There is also the strong sense of futility; that they
might be able to borrow however will not be able to repay the debt leaving
the system even more exposed to default in future.
Gold
is now the only alternative to the USD and I know which one I trust more. Of
course there has to be a place for currencies in the current system so I
don’t think the USD is finished at this stage. China will sell Euros as
it will need less of them for exchange purposes in that depressed area. What
will it buy but a mixture of other currencies and gold? The interesting thing
is that we now have the USD standing as the default paper currency for
international funds and banks.
Gold
could be approaching overbought levels shortly and might take a brief pause
or it may continue the current sharp rise higher. Nobody can tell at
present because of emerging fundamental events and the accompanying spin from
the authorities and vested parties. Markets do take note of even numbers and
spot gold nudged very close to US$1250 yesterday which makes this a higher
risk trade at present.
Is
this an important test for gold? The break out is real however we
probably have to test the former resistance at some point soon back at about
US$1210. I now favour a choppy ride on gold for a few weeks as we sort
through the profit taking and establish some price support up around these
levels from US$1200 to $1300.
There
is still de-leveraging in the stock markets, property, Europe and the AUD as
the global credit stranglehold starts to tighten. Credit crises are a slow
motion force and very powerful. They unfold slowly creating a creeping
gradual negative. Banks and funds have to lighten up in order to adjust
reserve ratios so bouts of selling are a certainty over the coming
months. This will include stocks and potentially even gold which could
be the catalyst to bring us back to test the former resistance level.
The
unwinding on the AUD is also real and has been starting to unravel over the
past month as previously predicted and discussed. This has been affecting our
gold stocks (along with our Super Profits Resource Tax proposal) and this
carry trade closure may well continue as an influence for the next several
weeks or months. The resultant capital outflows are mainly affecting credit
markets down here and lending has stopped almost completely but we are not
alone. I am hearing the situation is very similar in the USA and
Europe.
We
had a positive jobs figure out today adding some speculative support for the
Australian dollar however I think this support will quickly be overrun by
global issues and capital flows. The outlook for China is softening and
any bad news on this front will lead to an anticipated and real decline in
the Australian economy. This will also make some of the assumptions made in
the Australian 2010 Budget this week look very shaky.
As we
specialise in the gold stocks here we have to consider any effect on this
sector as our prime concern. The XGD rose another 2.2% today after rising
4.73% yesterday making it the outstanding sector this week. I prefer to show
you a more balanced view than the weighted XGD so here is an unweighted
chart of 20 emerging gold producing companies. This can enable you to more
accurately assess how inexpensive these stocks are. The resources tax is overdone
now considering we have AUD gold at $1373.
So we
are in a mixed environment for investment in the gold stocks Down Under
however they are cheap especially when you factor in the gold and AUD trends.
The Resource Super Tax is seen as a maybe and unacceptable to the industry.
The Government is now in ‘consultation’ with the industry.
Investors in this sector are rightly annoyed and experienced unnecessary
losses.
Our
leading gold producer assessed the tax as having a 3 – 8% negative
effect on their NPV depending on the detail. The good news is that this has
been factored into share prices across the XGD here already. At GoldOz we
forge ahead with the knowledge that gold will remain incredibly important in
the months and years ahead. This means the gold stocks we cover will be
essential to any portfolio too.
Here
is the long term chart of the AUD gold price and I want you to compare this
to the chart above to see where relative valuations are. So what can you see,
and what do you think?
It
all comes down to your entry point on these stocks and the foreign exchange
rate at the time you bring in funds or repatriate them back to your home
location.
Global
economic comment
“It’s
all better now”, now that we have thrown some more money at Greece and
hope the problems will go away. The Central Banks are obviously worried
about the financial fire spreading to the US, Japan, UK, Spain, Portugal,
Italy and even China. So they have come up with another massive debt plan for
Europe to fix the unwinding of the debt bubble (wow). Does that sound logical
or just another measure to buy time? But now we can get back to a rally
and the US is OK and we won’t see any contagion and the banks are in
great shape – ha ha.
Does
this sound like a load of piffle to you? I can assure you dear reader,
with the greatest respect to anybody that wants to believe differently, it
does to me. Somebody has to pay! The giant omission is that we
don’t have any plan to repay the debt. The elephant is standing in the
room and as hard as some people try to not see it the more it just stays
there.
The
debt can get transferred onto another part of the balance sheet as many times
as you like but this one fact remains – it has to be repaid. It does
not matter how you spin it either because the problem is not gone. It is not
going away by adding fuel to the fire or through the use of spin any time
soon. We face the largest debt bubble in known history and it has to
burst and there will be dire consequences made worse by excessive stalling.
There
is a glaring problem not being addressed and that is that Greece is going to
take years or even decades to repair itself. This makes for an interesting
example of a situation in play that many countries will have to face. Somehow
we have to absorb much higher interest rates and raise additional taxes to
reduce unsustainable deficits in a zero to negative growth environment. What
sort of a bad joke is this?
Higher
taxes and reduced spending are required to reduce deficits and this will hit
growth. Higher sovereign interest rates, which are rising due to a renewed
factoring of sovereign risk, will hit disposable income for Governments
further which will also impact growth.
Course
of action – own gold and gold stocks
This
will depend on your location and currency positions. AUD’s can be
safely deployed now and in the coming few months if careful selection of the
stock is made (obviously). Offshore investors that want to buy excellent
value in zero debt cash positive gold producers have to assess the forex
situation.
Their
question will be if the AUD can fall faster than the gold stocks rise and if
this will reduce their returns. Perhaps the pull back to test the old
resistance in the gold price will be a better opportunity for them. I still
look to the July time frame (approximately) for this event.
I am
working on the new version of the GoldOz Ratings Tables and this time I am
including special analysis on the ASX listed gold producers and their
offshore projects. This is necessary due to the proposed tax and along with
additional weighting on debt due to the increasing cost of capital. This is a
trend and we are adding a great deal of analysis on debt markets for readers
and clients alike because of the importance in this for your financial
survival.
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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