News
is out that European banks will have to write off 20% of their loan
books. The full news on Spain is not out yet, their banks cannot get
reasonably priced funding. How can we get growth under these
conditions? Despite all this the appetite for risk is apparently
returning at least for now. This increasing appetite could last for
anything between 1 day and a few months.
Local
news Down Under, news flash the Government has invoked a state of emergency
over their super tax’s opposition by the mining industry.
They have decided to advertise to inform us how “right” they
are. It just gets better and better doesn’t it? Governments
are all the same, in the absence of total understanding, facing the self
induced need to do something; they interfere with market forces making things
worse in the process.
The
AUD is falling again tonight as predicted and gold is going up as predicted.
This has taken the AUD gold price to $1,471. Our XGD is back up
over 6,000 and holding well on the general sell off as we have seen a drop of
12% on the XAO from the high on the 14th April to the close
today. In comparison we have seen a drop of only 3.5% for the XGD high
of 6278 on April 12th compared to the close of 6056 today.
The
XGD has been distorted by the LGL revaluation due to the NCM take over so I
have added the emerging producers 5 year chart to show the real lag between
smaller cap producers and the AUD gold price. As you can see these
stocks are falling slightly here in spite of the AUD price of gold. Now
we head into the final weeks of the Australian financial year and buying
season.
On
balance this presents opportunity. These undervaluation distortions
cannot remain for very long in such a gold friendly economic climate.
Some of our favourite larger producers showed appreciation to new all time
highs over the past few weeks. I have been saying for some time that
these un-weighted charts are less distorted by the heavy weight gold stocks
on the ASX and therefore more representative of the sector.
A
little story about debt, gold and Bondi beach
I was
discussing this current global situation with a colleague and we came up with
a fun analogy the world’s current, very serious debt situation.
Hopefully you will find this entertaining and educational and maybe you might
send it to somebody who needs to read it. Seeing as debt and gold are
so poorly understood in this day and age I feel it is important to cover this
topic with some good old fashioned common sense.
Analogy:
a swimmer is caught in a rip; a term describing a tidal phenomena where a
strong current (that runs out to sea in a channel) drags you out to sea if
you get caught in it. The rip represents any debt trap in this case and
they both work in a similar way pulling you into deeper trouble.
For
an individual this might apply to your credit cards getting further and
further behind until you can’t pay off the balance. This stress
means you cannot continue to pay off the mortgage and still live your normal
lifestyle. The way out of the rip is to float for a while, let the
current take you out to sea until the force diminishes. Once clear you
can swim sideways for a distance to clear the problem rip area and then let
the waves carry you safely back to shore.
In
this case the solution of going out with the rip initially is the equivalent
of going quiet for a while. You have to cut back your expenses and go
without some of your normal pleasures or activities. You may have to cut
back on basics if this has progressed too far. Some swimmers thrown in
might be lucky enough to wear a golden life jacket and would be able to float
out of harms way with greater safety. Some might own shares in the life
jacket and life buoy manufacturer so they can get out of harms way too.
You will do well to be in this group just in case.
This
“go with the flow” and pay the debt down solution idea is too
practical, unpopular and logical for sophisticated Governments; after all we
vote for them and they are “responsible” for doing
something. Their solution is to throw more people into the rip so they
can hang on to each other. They must think that will fix the rip.
When this does not work they tell the swimmers to swim as hard as they can
towards the shore, be patriotic, spend your way to wealth they told us.
When
this does not work they get really serious and get a machine in to increase
the water flow into the rip. Not being in the water themselves, as they
sit in their ivory tower, they can’t understand what all the screaming
is really all about. Well they sure are doing
‘something’ which is their job after all. Look at all the
water we gave them they claim. This pushes the price of water up but
that is OK.
Meanwhile
there are a bunch of onlookers on the beach sitting in arm chairs made of
gold and soaking up the sun while they watch on in concern. Behind them
there are apartments and penthouses overlooking the beach. They were
made of gold and silver too.
After
a while new data is released and the government notices the news is still
bad. The rip is still there despite all their brilliant efforts.
They might not be elected at all, now they get nervous. I am sure they
are concerned for the swimmers and redouble their efforts. But the news
is not as bad as the analysts thought as some swimmers got smart and floated
out to sea away from the other struggling swimmers. Some gave up
and drowned, may they RIP (rest in peace).
There
is still a lot of screaming and the drowning is increasing so they throw more
and more swimmers into the rip. They have to go to other beaches for
more swimmers where there was no rip, contagion sets in. Rips develop
at all the beaches after a while. My goodness the government needs more
staff to cope with the crisis and because they manage so many people they
deserve a pay rise. Pure genius isn’t it. Are you happy
with the story so far?
The
next step of the actual solution is swimming sideways across the beach for a
while and this equates to paying that last credit card payment removing the
imminent threat. Now you can create a few savings as a financial
buffer, this is equivalent to going sideways for a while as we are not ready
for any spending yet. This is not much fun you say, not fashionable
maybe even boring. I have tried it in years gone past and promise it
must be a lot more comfortable than the rip and certainly better than
drowning.
Meanwhile
the government hates a lack of spending; we need exponential growth they
cry. Of course the government does not reach this “swim
sideways” point; they are still in the rip trying to buy time with more
water. Next thing they regulate the beach because they should have
controlled the rips, the tides, the waves, the sand and swimwear
fashion.
The
swimmers have relatives who are on the beach and threatening to not vote for
them unless they do something. In response they are throwing more and
more swimmers, swimming coaches, pedestrians and even the life guards into
the rip. The re-regulate the lifeguards, tax the rescue boats and
threaten to sue them if they don’t stop the disaster. They even
turn the machine up harder and pump more water into the rip and out to
sea. (Is this the same as over regulation and chronic fiscal
irresponsibility?)
Letting
the waves carry you back to shore would be the point where you have your
financial buffer back in the bank and start to pay a little extra off the
mortgage, maybe fix up the car, just slowly. You don’t want to
upset the buffer you have created as it is your safety net. You still
remember the stress of the rip and that scared hungry feeling. You
didn’t want to drown, end up bankrupt with your possessions
repossessed. For a Government this is where your economy would normally
return to modest growth.
Finally
you reach the shore and take a breather in that golden sun and warm up.
This should be normal operation and where you want to be most of the
time. Meanwhile the Government has drowned itself, the banks and the
States, suffered riots in the streets and defaulted on their debt
necessitating a restructure of the entire financial system. It is not
just their fault as most of the population votes for those that promise them
the most. This is a symptom of the debt based monetary system and
because it has been with us so ling it is considered normal.
The
citizens that woke up early floated out to sea in that rip on their golden
life jackets. They had sorted their own trouble by taking responsibility,
before they became too exhausted in that debt rip, so they survived to land
back on the beach. Some of the citizens stayed on the beach and some
just looked on in horror from their golden penthouses.
Conclusion
These
are uncertain times because we are in uncharted waters. We are
gradually transitioning into a different world as power shifts from over
indebted developed nations to the emerging economies. Head winds, cross
currents, rogue waves, fat tail events are all buzz words you should all
learn now because you will hear a lot more about them over coming
years. Gold and gold stocks have a bright future because in the
most simplistic terms, things are uncertain and debt has gotten out of
hand. Throwing more money at a debt implosion is just like pumping more
water into the rip.
Sovereign
debt defaults have come and gone over hundreds of years and they are very
traumatic when they occur. However we have never seen such a large
number of countries simultaneously in difficulty with debt, and or struggling
with structural change before. Europe and the US, the UK and Japan are
clearly in decline facing a reduced growth outlook which should no longer be
supercharged by hyper-debt.
An
added complication which exacerbates uncertainty is the Euro experiment.
The Euro only began on the 1st of January 1999 and has been a
success during its early years. As if the world needed another major
monetary experiment. With the USD acting as the world’s
fiat reserve currency, and hitting all time highs, I guess it seemed like a
good idea at the time. Then the new millennia began and the USD began
to tank coinciding with the end of a twenty year bull market.
Countries
in the Euro Zone that need to restructure are highly restricted. They
cannot lower their currencies to enable export growth. They are
restrained by unmanageable levels of debt in some cases and need to
completely restructure, declare bankruptcy, default and then get on with
rebuilding. Such machinations will eventually create a loss of confidence
in currencies and drive gold higher, silver will rise with it. The
stocks will follow at times and lead the way at other times. At present
they are lagging the physical metals due to risk aversion and
de-leveraging. Time to get loaded up in quality, low geared, high
growth gold stocks is upon us now. Buy on dips and any remaining
weakness. The same goes for the precious metals – a life jacket
for the times.
In
2001 gold also awakened from a twenty year slumber which had ended with a hedging
induced artificial low into the USD$250 area. Without that hedging
experiment gold may not have fallen below the USD$400 area but this is a
subject for another essay at some point. This now distorts the
apparent magnitude of the rise in the gold price. A three fold rise in
gold from $400 to $1200 does not seem as dramatic as a 4.8 fold
increase. Gold and silver are not expensive at these levels so
don’t be fooled.
You
need to own precious metals and gold stocks now. You may not find
cheaper low cost, unhedged and debt free producers than here Down
Under. These metals and the stocks have a high probability of
going into a major price spike at some point. There are still several
strong bull market waves in front of us for the precious metal complex because
this debt problem will unfold slowly. This is GFC Stage 2 so get used
to it, things are not “better now” and the right steps to solve
the problem are yet to be seen. These steps are unpalatable under our
current electoral system and I really do feel for the politicians who are
caught between a rock and a very hard place. Disaster presents
opportunity so take advantage while you can.
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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