It has not been a comfortable May for
a Gold Bull however we have stood our ground in a most constructive manner
here at GoldOz. It is all about how much you
understand and how you handle the swings and roundabouts. Your actions alone
can either lower your wealth or increase it by providing added leverage when
the market turns back in your favour. What I am
saying is that these pull backs can be used to increase your grip on this
market sector or you can squander the opportunity by doing nothing, or even
worse you can sell on the dip and exit at the wrong time.
The first thing to understand is gold
itself as an asset class and why everybody needs at minimum some of it at
this point in history. You need to own gold is not the subject of this
article however. I am not a perma-bull however I
will not let go of a trend until it is over. Even a brief study of the last
100 years of monetary history reveals that the underlying root cause that
caused the GFC event has not been solved and that pouring gasoline on a fire
will not put it out either.
The developed nations have found
themselves in a hole and they are still digging. Some are digging at the
sides trying to create a ramp out and others are still going deeper. A lot of
good work is being done yet the imbalance is still there. The developing
world is facing challenges associated with rapid growth, structural reform
and the effects caused by hot money seeking yield, seeking investment return
and safety. Investors face renewed educational challenges so that they can
understand the risks, structure their portfolios for change and spot
valuation misalignments.
This article offers some notes on
constructive steps we have taken in recent months and which we have been
teaching our subscribers behind the scenes. We run a newsletter service and
an educational portfolio in our Gold Membership area of the site to teach
investors how to select, balance and evaluate their own investment decisions
as markets evolve in real time. The situation is fluid meaning that topical
news flows push waves of capital in and out of various markets based on risk
off or risk on.
The influential factors (e.g.
European debt, inflation, economic disequilibrium, commodity shortages or US
deficits) lie there smouldering until fresh events
ignite renewed interest in the media and in turn influence the importance
weightings put on these same factors in the multitude of computer programs
that control vast sums of money around the world. Plug the new event or
numbers into the algorithm and push the button. Some of the factors that
dictate future financial events are set in stone yet they are ignored when
the numbers or spin dictate alternate sentiment on the day. This creates
opportunity but only if you understand the big picture. How you structure and
manoeuvre your investments will dictate how well
you exploit these swings and roundabouts which are the greatest show on
earth.
We study the simmering disequilibrium
in the global financial system and distil the news events as they unfold in
relation to the Australian gold stocks specifically. However there is
certainly relevance to gold investment on a global scale and different asset
classes as we dissect the big picture. Gold and mining stock investing is
difficult however it is our belief that education is the key to success. With
all due respect investment in this sector without it is just gambling and a
recipe for disaster.
A deep conceptual understanding of
money, gold, mining and macroeconomics cannot be learned overnight yet it is
essential for success. We try to keep adding layers of data and the important
aspects to build this education over time for clients at all levels of
experience. The flow of ideas and sharing can mean that clients teach me at
times and this is exciting. There are many good hearted people in this world
despite what the media projects. There are those of us trying to pull as many
people into the life boat of financial safety as we can at this extremely
difficult and dangerous period in history.
That is enough philosophy; it is
shared by many of my colleagues in the precious metals business. The key is
to move with the markets and there are certainly ways to do this once you
understand these markets, including fundamental and technical analysis to a
high degree. Back in March there were emerging concerns again about Europe,
major upheaval in the Middle East and then the Japanese were hit with a
tragic disaster which caused a market panic at the time.
Here was my commentary at the time
(March 16th issue GoldOz newsletter GM27 - next
four paragraphs):
"I mention this as "best
information" availability to me at this time because the world seems to
think things are worse than they are with contagion of panic throughout
finance markets today 15th March 2011. This is not an event like Lehman
Brothers either, which was the 4th largest bank in the USA before it
imploded. This is not a 2008 GFC at this stage as the global credit market
has not frozen - the trouble is less general. This is a Black Swan or Fat
Tail event or whatever you want to call it however we have to wonder at the
true magnitude and duration. A level head and cool analytical viewpoint are
needed here to avoid potentially expensive and unnecessary decisions.
Japan is the 3rd largest economy and
is partially compromised at present. The whole economy has not shut down.
These people are incredibly resilient do not underestimate them. The short to
medium term damage to the Japanese economy is immense and they cannot really
afford it. There are global supply chain issues as well, as many parts
destined for manufacture come from Japan.
We have covered their debt and other
issues before so I will not go over it again. They are stimulating,
nevertheless it comes with the trouble in the Middle East. This is not going
away any time soon and it is likely to escalate pushing up gold even more.
Even Europe is now being noticed
among the mix. Blood in the streets - thank you Mr. Market I have been
waiting for the perfect time to move more heavily into these gold stocks. The
Educational Portfolios start to grow more now with different stocks that are
reaching attractive levels."
Gold went up from just under US$1400
to $1560 in the following 7 weeks and the Australian gold sector went up 20%
in the same period. Now two months later the news is that the Japanese
economy shrank at an annual rate of 3.7% in this first quarter and, remember,
their disaster occurred on the 11th March 10 weeks into that quarter. I did
not get every point exactly correct in a complex situation however the
sentiment effect, the overall assessment and conclusion was correct and that
is what counts.
So here is the point; understand the
significances of events and how it all fits together and you can then apply
this to micro aspects on the markets you are invested in. We bought
aggressively but within sensible money management techniques on the 15th
March. Here are the last three major buy, lighten up and buy back points on the
12 month daily chart of the XGD (Australian gold sector) in the past two
months as covered by our service.
The green ellipses show the start
point of this education (within our service) on the left and the two recent
buy points. The red ellipse shows the "lighten up" point on the
28th April and there was ample technical coverage of important influences at
the time. Those charts are not within the scope of this article but I can say
we use different time frames and market indicators showing how they interact.
As sentiment falls you get a drop in
traffic to the large gold focused web sites and I even notice a drop in
subscription activity. Investors are either waiting for some positive action
before they come back or they have lost some measure of interest in the
sector. I tend to do the opposite unless I believe the trend is either mature
or finished. I get more intensely interested on dips and corrections because
this is where you initiate investments and trades that set up your next
opportunity. This is how I have increased the value of the GoldOz Educational Portfolio in a flat market over the
last few months. The leverage will also be improved when the market does
launch into the next up-leg which is approaching.
This is the time to be doing fresh
due diligence on the sector to assess which stocks might move the fastest
during the next up-leg. It may be time to trim the underperformers and
companies that have made decisions you are not so happy with. It is time to
rebalance and adjust, to tighten your grip on some stocks or adjust your risk
weightings on the sector by moving towards the higher or lower risk stocks.
Your behaviour on the way up and ability to recognise and lighten up or sell at the tops will
determine how profitable you are. Here is the reason I believe the Australian
gold sector will rally in the near future, a picture is worth a thousand
words.
As you can see above the Emerging
Producers index was flat coming into the start of 2008, partly as a result of
rising costs; wages and drilling to name two pressures. The sell off into and
through the GFC was extreme even though AUD gold soared higher, boosting
profit margins for producers. We approached pre-2008 levels on this index
into the end of 2010 before correcting even as gold holds high levels. Cost
pressures have eased and margins remain very high. The trend is up for AUD
gold and this sector and the best news is that the gold stocks need to play
catch up. This is a blatant valuation misalignment and that spells e-n-t-r-y
p-o-i-n-t.
Right now we face one of the most
heavily flagged economic events in recent years, the end of QE2. We face
another round of debt ceiling issues in the US and this is not good short
term. The US has to raise the ceiling and they have to reduce the deficit so
urgent work and big decisions are necessary. Italy, European banks and bond
hold holders have just been put on renewed alert with Standard and Poor's
posting a debt downgrade warning. No wonder gold is holding up the challenges
out there and chances of a mistake are significant. For now the XGD and
bellwether stock NCM have rising 200 dma's. NCM
shows a strong money flow indicator and major supports have not been broken.
So we have stayed the course. We have strict discipline and levels for
support on this Australian gold index, if this goes we lighten back up and
look to the next level down.
We have been warning about one
problematic and dangerous bubble in Australia since our newsletter began and
it now turns out that this sector of the economy has now contracted for the
last 10 months. We have explained the dangers of exposures and how the banks
work in this market sector and its interaction with the general economy.
However gold, silver and selected miners have a great future as appreciating
asset classes. One problem is that many investors want it now and get
disappointed if it doesn't happen right away. They turn away and look
elsewhere before later finding out that if they had just stayed the course
they could have been right all along.
I am still just as excited about the
prospects for the metals and the companies that mine them as I have been all year.
Our methods have been successful this year so far in an oscillating,
difficult, challenging market. Our methods are now being described and
conveyed in the newsletter and portfolio like never before. The incredible
oversold levels seen in late 2008 are not coming back until a few years after
the gold bull finally fizzles out. That is many years away.
Our research is telling us that there
is a lot of money to be made in the next few years and a nice run later this
year for those who stick with the program. We can already see the entry point
timetable and also the dangers for many investors in this difficult period of
history. Wealth is set to transfer, change hands, is it leaving you or coming
your way? I hope it is the latter. If you want to buy gold with minimal cost
we have a buy gold link now at GoldOz.
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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