What about the near term future of the gold and silver markets, what we can expect to see?  Since I wrote that the gold chart had produced a “golden cross” in my early January article we have seen a 10% rise.  So right now in the very short term gold is getting a little overbought.  Any correction however, will not be as deep as we have seen over the last 6 months; the market is gearing up for a very strong move.  We are either nearing the end of the long consolidation in the current range or we are seeing the beginning of the next up-leg, the difference is quite meaningless.  What I am saying is that gold is holding firm at these new higher levels, it has moved up and may take a short breather while it gathers a head of steam for the next rally.  When will we know it is ready for take-off and what will it look like when it does?  How do we best profit and leverage our precious metals investments from here?

To help us examine this it may be beneficial for investors to observe some similarities between the precious metals and uranium at this time.  Since the amounts of gold and silver actually available for purchase are so small and the uranium market is so small… these two special market segments have much in common.  Gold and silver are rare.  So is uranium.  The distribution of these metals is very wide throughout the oceans and soils of earth however I am talking about economic grades in this case.  Gold, silver and uranium markets are all in a state of supply deficit. 

Above ground stocks have supplemented these deficits in uranium and silver, gold is a little different however there are strong arguments that indicate gold falls into the same category.  The key difference is of course consumption; gold is not consumed as such like silver and uranium are.  Yet supply has still failed to meet demand for gold by a wide margin and this deficit has been met by Central Bank selling, once again above ground supplementing supply.

Briefly… gold is so rare, only a 22 meter cube has ever been mined; much of this is not available for purchase.  Very interesting discussion about the potential IMF gold sales lately, it has been well covered by my esteemed colleagues on these pages so I have just one comment… what Mr. Greenspan and his affiliates wouldn’t do to get their hands on an extra 400 t of this vital metal.   There would be stiff competition from Russia, China and any number of elite investors to secure that much additional gold for their own future hedge against the uncertainty building in our global financial system.

Uranium differs in that it does not suffer from counter forces that need to see stability in the price in order to show the world that “things are under control” in the fiat based financial markets and monetary system.  So market forces are not geared to cap the uranium price in any way, the price is free to run to a point whereby lower grades are economic to mine and the faster the price gets there the faster the supply deficit will be filled, subject to mine development time lag.  (The faster science finds an ideal solution to spent uranium the better too... but that’s another argument.)  You could also argue that the demand for uranium is more predictable however there are many analysts such as myself that would disagree. 

Silver is an extremely useful metal and vital ingredient in our economy so it would seem that the combination of getting caught in the political crossfire with gold and this unrelenting inelastic demand is a recipe for nuclear fission (pun intended).  Military, financial, industrial and aesthetic uses for silver place heavy demands on the silver supply creating a supply deficit very similar to uranium.  Yet silver also plays second fiddle to gold in the current perception of the market and has not risen by the same margin that uranium has.  The market has this plainly wrong (or at least one could consider that these counter forces have altered market perceptions to a large degree and have extended the buying opportunity) and time will bear this out.

The overt management of the gold market therefore has had a negative effect on the price of silver by association.  Then there is direct opposition to silver, for instance as a viable parallel currency as proposed in Mexico.  The Central Bank of Mexico has so far blocked a proposal which had almost unanimous support in Mexican politics and by the people.  Then there are the various forms of paper selling of silver in the face of a lack of a balancing level of available inventory which is absurd.

One can logically conclude that as demand for gold and silver increases and available supply continues to contract these counter forces to gold and silver will slowly (possibly rapidly in the face of a sudden shock) subside.  Continuing pressures from fundamental factors will force this into being one way or another, the only question is the timing. 

Uranium Down Under

My observation is that uranium is providing a wonderful preview of what is to come in the near future.  This relates to the physical commodities and to the shares traded in the companies that mine, are developing mines or are exploring for precious metals.  This is where it gets even more interesting…

Uranium shares are hot because the market price has reached a critical tipping point to attract demand from all quarters.  This has been building for some time.  Investors have now stopped worrying about where the companies are listed and have even begun to throw money at outside chances, companies without likely new mines.  The rally has reached a point where the smaller cap stocks are also moving strongly.  I have been going through uranium charts of a large number of companies in order to include them in a new product I have just completed and the vast majority show very steep gains. 

Stellar gains are being made and you cannot find ADR’s on these stocks, even if you could find them the action is here. Liquidity levels are usually such that one does not place large investments in these stocks however there are many of them so risk can be spread across the sector.  Any investor that has employed this strategy has done extremely well as shown by the charts of these stocks.  As bull markets reach into this phase the gains are more reliable, demand far outstrips supply of the shares at this time forcing investors into other regional / national markets and stocks they would not otherwise consider.  Gainers become more wide spread across the sector.

The global investment community has entered the ASX market seeking out share investment in a limited global uranium market.  This has had a market effect in these companies / charts and on profits of participating investors in Australia to date. 

Gold and Silver Stocks Down Under

As the market fundamentals overwhelm downward forces in the precious metals we will see identical behavior in the charts of the ASX PM miners as well.  I strongly believe the scale will be even greater because this is the nature of PM Bull markets once they get going, history is our precedent.  Fundamental factors that drive these Bulls are fear influenced unlike the current uranium demand crisis.  When silver comes under the strong influence of both demand crisis and financial uncertainty factors it will be very exciting and highly profitable.

The current scenario in uranium stocks in Australia will play out in gold and silver stocks as well.  The same buying and chart patterns will emerge across our PM sector from heavy weight to junior “outside chance” explorers.   When the same scenario for gold and silver stocks in Australia plays out as it has in uranium we will see a violent rally.  Think about very large capital flows bidding for virtually non existent supply and imagine the price gains possible.

I have seen moderate flows with some stocks recently as I view the depth on my screen in addition to other professional data flows.  Buyers lined up on the bid side trying to out-do each other for such limited stock.  On the ask side, smaller sparsely placed sell orders, missing are the savvy investors who got in early and are holding tightly.  The buyers have to wait or buy in at any price which is risky from a “clean entry point” consideration. 

Earlier it was a steady soak up exercise, the better plays get bid sharply higher to attract the sellers, in some cases a sudden 10%+ jump in the morning.  Then steady soaking up at the new higher price until demand is satisfied followed by a breather as the buyers move to another stock for a while.  Volume patterns and RSI on the charts can show where this is happening.  Metered buying is fairly common to see as well with such stocks as I have observed.  The buying is done patiently so as not to give the accumulation game away.    Of course this is far less common for gold stocks at present but the future patterns are there to behold in uranium.

As for gold and silver stocks… I prefer to look for growth stocks so that this effect will be amplified in the scenario explained above.  Stocks where the price is headed higher anyway, regardless of the rally must surely minimize risk.  These are key targets; which is why I have taken the trouble to compile and research several lists of our PM stocks into separate categories, it helps clarify these opportunities.

Speaking of risk our Westernized market system and political climate have resulted in a long steady low level of sovereign risk in Australia.  In times of uncertainty this is even more important.

Our PM sector is now coming off a low base and has raised considerable capital.  This does advance exploration and this should be resulting in new finds, expanded resources, development of new mines and exciting exploration plays as this next stage of the PM Bull gets underway.  Our established miners will gain from the leverage factor of rising sale price versus relatively static cost structure.  If a miner currently makes $200 per oz profit at $800 then they will make $600 (3x) the profit with a price rise of just 50% to $1200 per oz.  Thinner profit margins actually amplify this effect.

Conclusion and Summary

• The uranium rally is strong and unimpeded by monetary factors, therefore more realistic. 
• There are many general similarities between the uranium rally and what lies ahead for PM stocks in the Australian market.
• The differences between uranium and PM fundamentals point to even greater gains ahead for PM’s.
• The uranium rally on the Australian stock exchange provides a preview of what is to come for ASX PM Stocks.
• Gold and silver rallies are close at hand.
• When demand for PM stocks heats up the investment will come from all quarters and it will be aimed at all PM related companies.
• Australia is an excellent investment destination for the global investment community to participate in mining stocks.

Good trading / investing.
Regards,
Neil Charnock

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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.