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A public update from GoldOz on global events and the Australian gold sector is
long overdue. Please forgive my absence it was due to travel and time constraint.
The debt ceiling is the big news this week and for several weeks behind us.
The consensus is that the deal to raise the limit by at least $2.1T and cut
spending by $2.4T over ten years is a compromise and this is no surprise. The
US credit worthiness is under question and so is their status as an AAA
rating which is only shared by 16 other countries. The ratings agencies
wanted a $4T increase in the debt ceiling to stave off another repeat of this
circus before the next election.
The elite members of this AAA club
are currently: USA (-), Australia (0), Singapore (0), Canada (0), New Zealand
(0), Austria (0), Denmark (0), Finland (0), France (0), Germany (0), Guernsey
(0), Hong Kong (0), Isle of Man (0), Liechtenstein (0), Netherlands (0),
Norway (0), Sweden (0) and the UK (0). Note: (0) denotes "stable"
and (-) denotes a negative warning which was handed to the USA while I was
away a few weeks back.
I expect the Ratings Agencies to
follow through on the downgrade for the USA. The House backed the new debt
Bill 269 to 161 to a round of applause. It is good news to avoid default but
not to go even deeper into debt with Debt to GDP already at over 93%. The new
(apparently flexible) debt ceiling pushes this ratio up well over the 100%
level. There are many questions about the deal to be hashed over such as the
timing, certainty and efficacy of the cuts.
In Europe we continue to see Spanish
and Italian bonds sell off along with the European banks which were hit hard
as reality bites. Last night Deutsche Bank AG fell 23%, Commerzbank fell 47%
and UniCredit dripped 40%. The weakness in the EMU
debt markets is actually making the much flagged US down grade less of a
threat to the USD because there is just no other credible alternative. Gold
benefits of course so we have seen the normally weak summer period in the
northern hemisphere fail to weaken the gold price.
Italian stocks were down 4.5% last
night as their 10 Year yields rose to a record euro-era high against the
German bunds. The spread widened to around 3.5%. Merrill Lynch Global Wealth
Management remain on the sidelines on Italian and Spanish bonds as do Pimco; neither of them are interested in this yield and
the current risk / reward scenario.
Confidence and trust are low and this
is one reason you have pressure under the gold price. Markets hate
uncertainty and gold loves it, there is nothing certain about the future of
the peripherals in Europe or the outlook for Japan, the UK and the USA. This
problem is far from over and this is all has a strong influence on potential
upward momentum for the XGD (Australian gold stocks). HSBC just announced job
cuts of 30,000 and they are just one in a long line of banks and companies to
take this action. The unemployment phase has not hit the markets yet however
you can expect this to accelerate from here on adding to pressures on those
bank loan books and reserves. This means we still face intensified
uncertainty to come.
The XGD or Australian gold
sector has bounced off lower supports around the 7000 level yet again in
June, signalling the possible beginning of a major
move that would see gold stocks play catch up to the gold price over coming
months. The two month XGD down-trend, from the end of April is now over and
now the larger question arises; do we break out of this longer term
consolidation in the near future? The top of the consolidation range is
the 8400 level so a decisive break above this is required to break out.
We have to assess fundamental value
before we can form any sort of opinion on this issue. These stocks are
extremely undervalued when viewed on a cost / margin basis thanks to that
buoyant gold price during this northern hemisphere summer. They are also
undervalued compared to pre-crash levels from late 2007 when the price of
gold in USD and AUD was vastly lower. The gold stocks are at the second
cheapest level they have been at, compared to gold, than they have
been in the past 30 years according to Sprott Asset
Management. The Sprott team have
to be taken very seriously due to their brilliant credentials and track
record; I share great respect for them along with the industry.
The XGD has been grinding sideways
for 11 months now, even as gold in AUD terms trended a further 10% higher.
These stocks were already undervalued compared to AUD Gold 11 months ago
making them even better value now. The XGD has plateaued effectively at a
higher level and refused to go down over this time. This is a very strong
sign; a high level consolidation can be considered the same as a baseline
consolidation and equivalent to a decent sized correction. When long
consolidations finally break to the upside the move is usually explosive.
This 'higher' XGD level actually
followed the super extreme crash of late 2008 when gold stocks hit 500, 600
and 700 day moving averages during that panic phase. This marked them down to
the cheapest levels seen in decades. You don't get many opportunities like
that in a secular bull yet most investors ran the other way. The point is
that the 'higher' level plateau is only 'above' a super extreme low not at
the top of a sustained run. There is ample upside potential to be presented
when the time is right.
Considering the depth of that
selloff; a major move up was to be expected yet the XGD underperformed
pre-crash levels markedly as investors continued to shy away from general
equities and "gold stock risk" only to launch back into riskier
assets due to a lack of understanding of the emerging investment climate.
Technical Analysis
Who says technical analysis (T/A)
doesn't work? We have accurately nailed the larger and smaller turns
of the XGD at every single point over several months using our T/A systems
and what's more we educate members on the "how & why" as we go.
I have found that the early stages of using a system can yield patchy results
and put investors off, so great care is needed. Any system needs correct
application and since the markets and charts are highly complex it just takes
considerable time to master.
So we teach in real time, along with
the market explaining what we are doing as we go with commentary designed to
impart this knowledge. As for our recent record and the question about the
viability of T/A; one or two moves in a row might be explainable but not seven
in a row.
It does seem hard to imagine that the
past track of any given price can yield any accurate prediction of future
price. I grant the T/A sceptics that much. What you
also have to ask yourself however is how accurate can you assess the
myriad of fundamental factors that can affect the price of any investment?
This is an extremely difficult task. To accurately quantify any given macro
event, to evaluate the effects of a mix of complex and it times conflicting
macro forces and their combined effect on the micro fundamental analysis of
any single company is enough to test any genius. You can be right about the
company and the technology and can come unstuck due to Government
intervention, Mother Nature and other factors.
Things do change due to fundamental
reasons; 'fat tail' events and policy can change and these can and do have an
abrupt impact on share price. These factors can drive sudden reversal in
sentiment creating a capital wave that floods into an asset class or out of
it sending the price sharply higher or lower. In general though, the skilled
fundamental analyst will pick a macro trend which is confirmed by
powerful economic forces to produce a steady price rise and that sounds
like a price chart evaluation to me. It is a chart measurement driven by
fundamental forces, understood by this type of investor who cares little
about timing except over a very broad time horizon.
Let's cut to the chase shall we; both
methods of analysis depend on human evaluation and therefore the
effectiveness of either method, or a combination of both depends on the skill
of the operator. For me this is the most interesting game going and I happen
to love the challenge, random nature and personal dimension of investment.
Fortunately for investors the
precious metals community has been right for a decade so far and yet many investors
have not made their killing so far. Many had very useful profit levels up to
early 2008 only to see their gold stocks and wealth get hammered over the
ensuing months. The nice thing is that gold is in such a long term trend so
it can be invested in successfully with the right knowledge using fundamental
or technical analysis, preferably both.
Right now we see a continuation of
the rise in the XGD off that 7000 level and thanks to the RBA keeping rates
on hold the AUD has gone the opposite way to spot gold tonight as I complete
this article. I am extending the discount offer for Gold Membership at my
site until the end of August due to the lack of recent promotion if you have
interest. It does not seem fair to put the price back up when hardly anybody
knew it was on offer.
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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