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The recent sub prime crisis marked a very significant shift in global markets. This shift has been expected by the gold community for several years now. We have spoken of systemic imbalances and also warned about the property sector / bubble for years now. The first major crack in the mainstream investment world has come at last and it was heard around the globe. It may not have been recognized as such as yet however that is what it was. This is the real beginning of the precious metals era especially in Australia.
I am not shy to state that I predicted, back in January, a strong rise to begin in gold and silver this year. However I thought it would not begin until the second half and now as we approach the end of the gold pennant formation on the gold chart I favor an upside break. We are now likely to see a period where the precious metals make it to the mainstream investment arena. Not all at once though as in all bull market legs they start slowly and gradually build. This is big news for the fledgling ASX gold bull as I have previously described and the charts below forecast / highlight the events to follow.
The sub-prime crisis exposed the tip of the iceberg and the first round did not go to gold or silver as they were indiscriminately dumped to cover margin calls. This was necessary in order to avoid the seizure of collateral – so even safe haven gold and silver were dumped in the rush along with other valuable assets such as ASX resource stocks. The iceberg was created in a period of low volatility, the iceberg is not just the mountain of debt and derivatives it is also the actual practices which allowed broad classes of financial products to be created and cross hedged. This was the fashion when volatility was low, yield was king - however these days have finished.
Now the FED will have to shift their bias from inflation fighting and a higher interest rate stance back to a more stimulating and accommodative posture. At the same time we will see bouts of the Yen carry trade being unwound amongst the volatility (most likely causing some of it) which will add strength to the Yen. Many were confused by the strength of the USD and I had warned about this bounce from the 80 level. I hope it saved some traders from the premature USD bear trap that I expected. The GoldOz Weekly Newsletter contributor Colin Emery provided a full explanation of the recent events in our latest issue – including what we may expect to come, sub prime and otherwise.
As Colin put it “the only potential bail out that can reduce the pain of future resets of sub prime mortgages written after 2003 is a reduction in interest rates”. Resets have not yet peaked so the pressure must be reduced and yet price inflation of food and commodities is likely to remain high due to demand and weather patterns. Thus we will see pressure on first world living standards, social unrest, the US economy, the USD and the real return on investments after inflation. These conditions will be great for gold and gold stocks alike.
Global growth will come off from overheated levels; however do not assume that resource hungry emerging economies will now cease to grow. Neither should you assume that their citizens will now decide they do not want an improved lifestyle. The resource war will remain in force even though the US housing market will remain under serious pressure and potentially first world housing markets will also drift further into decline. I predict it will remain in force because neither US nor First World housing drove resource prices higher.
Two schools of thought on this one – monetary causes and the other is the China story and I subscribe to both. Demand did fuel shortages, inflation assisted the price adjustment we have seen over the last few years and hedge funds do distort the price swings to more extreme levels. It would seem absurd to argue that there has not been commodity demand growth in China, India, Russia, Brazil etc or that mine supply has been able to keep pace.
But at the same time we will see further cracks appear in the financial system which will further weaken the confidence in the banking system. As capital is shaken with force from investment classes now exposed to weakness it seeks out safe havens and yield. After shocks in the sub prime and other asset classes will maintain the volatility and increase the appeal of gold – silver will follow.
In Australia we saw the wash over effect of unwinding of assets and the rush for capital. Our resource stocks were hit hard whereas gold and silver have remained relatively calm. This has created a divergence to the low side – of these stocks compared to the metals which has created a magnificent opportunity. We have been adding free resources at the GoldOz site with a new gold index page and here is the chart of the top 20 producers -these charts get updated daily thanks to our friend Nick Laird at Sharelynx.
There is also an Emerging Producers chart and a Gold Juniors Index chart that shows the strength of the rally prior to this correction. This asset is worth a regular visit as there are no such index resources provided by the ASX. I have also updated, upgraded and sorted the ASX Resource Stocks page as an additional free resource – links to 365 ASM PM miners.
The Australian dollar, which we had warned needed a correction, was oversold in the panic which has created an ideal window for foreign capital to be deployed in this sector. I believe the first reverse flow has just created the strong bounce in the AUD. Gold shot to over $AUD800 once again in the drop despite the metals remaining under pressure. Thanks to our friends at Kitco you can view gold in AUD and all currencies via links at the bottom of their home page, an excellent resource to assist investors to keep abreast of global price trends.
The AUD is expected to resume it’s uptrend which will enhance returns for offshore holders, particularly US citizens who would otherwise see a decline in their global purchasing power. ASX shares can be traded via Hong Kong with a discount broker or $100k + players can even gain a senior client status with the likes of Colin Emery.
The Junior and Emerging Producer sectors are of particular interest to me and I can now show you one chart as to why this is so… Behold a magnificent uptrend and over correction and opportunity – a picture is worth a thousand words. See the rise well beyond the May high – what do you think this predicts??
We have declining production levels for gold and as the prices rises there will be more reason to de-hedge and to mine lover grade reserves to prolong mine life which will exacerbate this declining production trend. I am extremely bullish on our gold stocks again and have reduced my base metals and diversified miners exposure of late. There will be more shocks as stated above which may expose further opportunity which I shall do my best to report on at the time.
I believe each successive shock will do less damage to this sector and that this trend will reverse in time to create strong demand instead. For now trading conditions are ripe, nervous selling and wise accumulation is the nature of the beast so we have unusual volatility in PM stocks here still. I even managed to trade one of our diverse larger cap miners off a 400 DMA slump during last week – yields and earnings are extremely attractive.
I have just completed my most comprehensive list and profile of all 315 ASX precious metals miners in a major product upgrade. This is available for only AUD$35 for anybody interested in saving themselves 100’s of hours in research on this subject. I get a great deal out of this process each quarter as I can spot the movers, shakers and market makers, so can you in thumb nail format – some with charts. An annual subscription is only AUD$125 and I will throw in an additional quarter taking it to 15 months as a bonus while this article is current on this home page.
Our Weekly Newsletter has just 3 discount annual positions left and several 6 and 3 months positions left for those considering the benefit of expert assistance during these volatile times. Commodity, currency and stock charts with global “top down analysis” included. Regular prices will remain great value however if you still want a discount this is the very last call.
Summary
Things have changed in the investment world as predicted by gold commentators for some time.
Property was a very poor investment as predicted.
Sub prime worries not yet over.
Other asset classes are set to follow as the cracks in the system widen.
FED forced to ease rates, forget about their inflation “stance”.
Food and commodity inflation to remain high.
Negative real returns to stimulate gold.
Flight to quality, capital growth and safety to stimulate gold.
Gold production to continue to fall in conjunction with higher demand.
Australian resource sector oversold and undervalued.
Our Juniors and Emerging producers have been performing well and were hit hard creating more opportunity.
Australian dollar in uptrend and was just hit hard creating a window of opportunity for foreign investors.
Remarkable confluence of events, conditions and circumstances has occurred.
Gold Oz has upgraded our site, free resources (including share investment information page) and product range at a very helpful time and we stand ready to assist at www.goldoz.com.au
Good trading / investing.
Regards,
Neil Charnock
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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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