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It has been a hectic week here
educating clients about global capital flows and debt cycles. One of the
really interesting factors at play Down Under has been the unwinding of the
carry trade which accelerated last night. The message it not always understood
so I will be preparing a file to explain how this works as further education
in the Members area of my site as soon as time allows.
I have been warning that the AUD
is an exotic currency and this means that when risk aversion increases the
AUD gets dumped. When I hit the office at 7am this morning it was down to
US88.6c off approximately 3c. We have been waiting for this opportunity to
start to unfold for our offshore clients and warning this would happen in
articles like this one.
We have several negative
influences in the markets at present. These are the Australian resource super
tax proposal, global sovereign debt issues, the growing wild fire in the
banking system in Europe and the unwinding of the carry trade on the AUD.
Global appetite for risk is diminishing rapidly. To add further woes we have
the end of Australian financial year sell off merging with the "sell in
May and go away" seasonal factor and a potential explosion of margin
loans which have built up here again since the 2008 debacle.
I have been pointing to a top in
April and buying opportunity in the gold mining stocks here in Australia
during May and June. This was forecast before any of these fundamental
developments emerged. That is not to say I did not see Greece coming I have
been warning about it for months. There was no way to really tell when it
would hit the "reality" threshold and threaten markets sufficiently
enough to see a reaction.
The crisis in Europe is still
unfolding and at present the holders of Greek bonds can still go and borrow
money against the asset from the ECB. That could be about to change however
due to the looming refinance deadline. Therefore I have to warn investors
that the credit conditions are potentially about to get worse not better.
Banks in Europe either cannot get new capital or the price they are being
offered is above the threshold of commercial viability. I heard 8.5% was the
best rate offered for one European bank this week.
I have been warning that the cost
of capital is going up and now I have to warn about this again in stronger
terms. Cost of capital is going up sharply and this is emerging now. Here
comes the next credit crisis (I wrote this yesterday and finishing off this
morning).
We are therefore looking at
producers with strong balance sheets and minimal or zero debt. Interest rates
are on the rise in Australia and the unknown surprise to come here is that
our banks have to go to the international credit markets to raise capital to
lend. Therefore it will not matter if the local BA rate is held at 4.5% or
not the banks will still have to keep raising rates.
You will have heard there is a new
tax proposal on the table here Down Under which should never have seen the
light of day. I am not getting involved in the public political debate
however I have posted a major in depth response to the Governments Tax
proposal for my Membership base. We also posted a list of locally listed
companies with offshore projects that would not be subject to the proposed
tax. This group of companies will have more flexibility to move their head
office offshore and if necessary de-list in Australia if push comes to shove.
Investors may have temporarily
lost confidence in our mining sector and I am not surprised. Remember though
that this is NOT legislation and would not be brought into law until after
the next Federal election later this year. It could be blocked by the
opposition and it would also have to pass the Senate so this is NOT a done
deal. I wrote recently that we had to see how this pans out as we did know the
Henry Tax Reform Report was due for release. I was talking about the detail
and now the cat is out of the bag the mining companies are assessing their
options. I am speechless that the immense knock on effect is being ignored by
the Government and will leave it at that for now.
What we have to focus on for
now is the stocks that have offshore mines and are therefore not affected
by the proposal. Canada also looks great now, even better than ever and we
are shortly moving to assist our client base to understand opportunities on
the TSX. The Canadians are sensibly offering sovereign protection at a tax
rate of 25% as they are not the only ones that smell opportunity.
Emerging
Opportunity
Previously I warned of a top area
in April and have been suggesting that the gold sector would present premium
buying here during May and June. We have been seeing a stock panic over
recent trading days and weakness is the theme as profits are wiped off the
board.
Level headed elite investors buy
undervaluation and sell overvaluation to amass their fortune over the
fullness of time. Many less experienced investors grow despondent as share
prices fall eventually selling undervaluation. This latter group often get
over excited by good news and buy overvaluation or tend to hold hoping for
greater overvaluation at price tops.
Gold stocks Down Under were
already undervalued in many cases and now I would suggest that we are likely
to see a massive undervaluation develop in the coming several weeks. For US
investors I would want to see the USD: AUD ratio rise significantly. This
would enable you to send funds to your own Australian account here at a
favourable exchange rate to snap up super low bargains.
The behaviour of gold overnight suggests
to me that investors are buying paper gold at last and shunning paper notes
that promise gold. This is both unallocated gold and it is also fiat
currencies. Confidence is diminishing and I am so glad I have been getting my
direct clients out of most stocks these past several days
The global conditions I have
mentioned above are likely to cause this condition and immense opportunity.
When the tax proposal fails in the coming months the temporarily tainted
sovereign risk status of Australia would be reversed. This will not be
necessary for excellent returns however it would be a significant benefit. I
would rate the chance of this as quite high especially given the worsening of
stage 2 global financial crises.
When I say some of these gold
stocks Down Under are undervalued I am not overstating the fact. Just one
example of this is the forward P: E ratio of an emerging producer that has no
debt or hedge exposure. Working on forward projections brings me to believe
this figure is approximately 2 at yesterday’s valuation. Their current
valuation is not far north of assets plus cash valuing their gold at nothing.
The falling AUD is also a benefit
as there is a strong possibility that our dollar will fall faster and further
by percentage than gold. The AUD has fallen ahead of any major correction for
gold so far sending the AUD POG to $1360 after a long consolidation around
the $1250 level. This means that producers here are being marked down when
their profitability is increasing dramatically.
Get aboard for your Gold
Membership at GoldOz and get your homework done this will be an opportunity
you do not want to miss.
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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