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Currency Trap, Gold and the Resource Bourse
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We watch the currencies very carefully on behalf of our clients for three major reasons.
1. Foreign investors and traders have to consider exchange differentials for international capital movements, to get it right in order to maximize their gains.
2. USD volatility and movement is widely considered to have a large influence on the price of gold (and silver).
3. The resource stocks we cover often have sales agreements based in USD, offshore operations or dual listing on international markets so it can affect their bottom line and that includes base and precious metals.
As the AUD / USD exchange rate has now eased a little from recent short term highs - it is approaching an ideal time to deploy some funds into the booming ASX resource area but be patient. There is not a great deal more down side risk in the currency exchange however there are many high RSI readings on the resource leaders at present. Do your homework now and select the right stocks that suit your own personal investment style and risk profile. Then look for the right entry level opportunities that will present during the next few weeks as we draw down to the end of this financial year. More in this further down however I want to discuss currencies first.
The current consensus is that the USD is going to hell at a rapid rate and that this is the end of the US economy and we just don’t buy that at this time. No denial that the USD is in a down trend or that it is at a critical point right now. No denial that the greenback is facing a major decline in global stature either but we do caution on the short selling of the USD based on the anticipated break to the down side below horizontal support lines when we are really looking at a long term down trend channel. The point is that this is an orderly decline at this stage and necessary to rebalance some major imbalances in the system so it is a good thing… but don’t expect it over night either.
In fact we have just done a comprehensive research study, handled by the GoldOz panel expert Colin Emery and this is part of his lead into the subject for our clients this week… “Yet again I am concerned that many commentators want to put the boot in the big buck – and the doom and gloom merchants love signaling the end of the US Dollar – and I’ve had to listen to this view for the past 25 years – 15 years of that as a Manager of Foreign Exchange trading desks for International Banks.” Colin has heard it all before and cites an example of a good purge and his reasons for his current opinion.
So from a contrarian point of view beware that the “counter think” gold bug and USD bear crowd - now crowded onto one side of the “USD death view” ledger – shorts may get caught and it could be ugly. This could easily create pressure to the upside after an initial down side break which confounds the crowd and enriches the other group further.
Relevant news out over this weekend:
Asian finance ministers agreed on Saturday to pool their foreign reserves to help avoid a repeat of the financial crisis that devastated the region a decade ago. Ministers from ASEAN member nations along with China, Japan and South Korea (ASEAN+3) have been seeking ways to strengthen the region's seven-year-old web of bilateral currency swaps, called the Chiang Mai Initiative (CMI), and transform them into a more powerful multilateral scheme.
Now, Asian countries including China and Japan have foreign reserves totaling around $3.1 trillion, accounting for about two-thirds of the world's total. Currently the CMI is a network of 16 bilateral currency swap agreements that total $80 billion. The idea of the CMI is that a country with a short-term liquidity shortfall can borrow reserves from partners in the network to absorb any heavy selling pressure on its currency without having to resort, as in 1997, to a damaging devaluation. Source Reuters.
And Colin’s comment on this…
“This highlights a few points I have been making about currencies and will re-iterate them again – The International markets are moving into the next evolutionary stage – in fact you could say sophisticated – very integrated – but this integration is not as we previously have seen increasing risk but being done in layers to diminish risk in the longer term as the above initiative and others are being designed to ensure.”
Colin then goes on to talk about currency weightings in foreign reserves and some important changes that are appearing on the gold front at this point in history. Gold is increasingly back in fashion and this is only just taking shape and exerting an influence. Generally speaking we are seeing a rebalance of weightings across the currencies and including gold in response to the changing economic world we live in. Oil for Euros is no slight influence and neither is the gradually increasing acceptance of the Euro. There is also the issue of new member countries under the Euro net and the need to convert to the EU, along with corporations and a number of other factors.
Also of note in this regard; the well documented Foreign Policy issues such as Iran and their strategic stance on the Dollar… has an influence on continuing EU strength. Currency and metal traders, mining companies and resource investors or traders across the globe would be well advised to gain the professional big picture on these markets and issues from such a trader, even if as a second “hedge” opinion and all this is available via our Newsletter if any of these parties have interest.
We have covered the; USD/YEN, USD/EURO, AUD/USD and the EURO/YEN this week in a special bonus edition. Colin also covers the normal issue; base and precious metals, the ASX, the ASX – S&P 300 Metals and Mining Index and several stocks each week. We still have the generous introductory discounts running however with the end of the financial year and meaningful tax deduction pressures coming I will be surprised to see many of these discount positions left in a few weeks…
Gold and silver implications of the changing conditions:
For gold bugs it means we are not going to see an immediate collapse in the USD and “gold going to the moon” which is a great thing. What we are seeing is a gradual shift to a lower global reliance in the USD and a gradual shift to gold as a fashionable currency and reserve asset in it’s own right. Now this has massive future implications for gold as well because if we are only looking at a controlled situation and rebalance in the current higher gold environment then imagine what is to come. As Central Banks move to higher weightings of gold, particularly in Asia, and the Western Central Banks continue to soften their sales programs, we will see a major gold supply source cut off at the knees at the same time as we experience an extremely strong increase in demand.
I would prefer to see an orderly unwinding of; US Trade deficits, global reliance on the USD and the unfashionable status of gold and silver than a disorderly collapse. This later event would only hurt more people and ruin more finances and lead to more international instability which we don’t need. It would also lead to a premature spike in the precious metals and unsustainable gains. No no… that would not suit the long term gold Bull Market because it takes time for the companies to develop their production capacity to supply increased gold demand and we should only wish to see that come to fruition.
At GoldOz we would prefer to see the trend develop and continue over time, with minimal social disruption, and for the companies to bring production on stream and dividend payments to become the norm. Increasing dividends will show the miners are having their deserved time in the sun and the early investors who can stay with the Bull Run will become wealthy compared to those who miss it. So where did this long term rally really begin?
I have stated my opinion before that the gold price should never have gone below US$400 per ounce and only did so during a complete aberration caused by the briefly self sustaining fad of forward selling un-mined reserves and foolish (long term) divestment of gold which went against thousands of years of wisdom. So I tend to take $400 as a floor price and smooth out the dip below that level and then finally adjust for inflation in order to gauge where the price of gold is in present time... in real terms. We have seen a strong run from US$250 and the chart looks steep however this distorts the long term picture, it may fool the uninformed however not the savvy gold community.
So… if US$400 was the floor and we adjust for the massive monetary creation or inflation over the last 36 years since the final currency - gold link was severed in 1971… then this market has just begun and the precious metals are very cheap indeed despite the current non inflation adjusted record highs for gold on a monthly closing basis.
Near term picture view of gold and silver:
Gold has some work to do to get past these resistance levels as our subscribers have been warned. The brief false break the other week and quick plunge back to test the lower 70’s level was also a false move but this held firm and rejected this level Friday night. This price action and tension below overhead resistance reminds me of the late 2002 battle gold had with the $330 mark… I was there, confident and patiently waiting then too. We will head for near term over head targets as mentioned to our clients, just as soon as $692 is reliably breached.
Silver; we warned of short term technical weakness last issue and my last article and a small drop did arrive along with support at the $13 mark. We saw a good reversal and note that not all technicals remain negative, only the moving averages at this point so conditions have improved.
Now to the Resource Bourse:
I have been updating my PDF sets for subscribers and have noted a marked 50% jump in share prices across the broad mid sector of my coverage. This delights me as my clients or even those who may have been encouraged to buy ASX PM Stocks because of my writings would have done really well on balance. That is what it is all about in my humble opinion. The uranium product buyers – and uranium investors have had a wild field day too. Things are starting to simmer down under and now all eyes turn to a time later in the year when gold is breaking new highs. So is this just a prelude to a real rally? What do you think?
Thing is that this rally has happened as predicted in my articles, but it happened during a time of frustrating sideways grinding in the gold and silver price. Our assets are just too cheap and our dollar is just showing too much upside potential so bringing home the bacon after a bigger run could be very nice for offshore investors. The yields of many of the larger resource stocks we cover on our spreadsheet have been and still are low by international standards too.
Back to the broad selection of stocks I cover… the strategy of sorting them into categories has worked very well. If you have the time to do this I recommend the move. I separated the Producers first and also into large and smaller companies. Seasoned traders would see the value in this immediately because it is generally the larger producers that move first. Then I sorted out the Developers, companies that have moved to the decision to mine stage right up to imminent producers… once again sorted these further into smaller and larger developers because most of the excitement will come / did come from the larger assets and this came to pass too. The large developers had their run and it was very strong.
Then there is the Leading Explorers and Mid Tier Explorers hoping to define a project and some in pre-feasibility stages. It was the leading explorers that boomed last in this pre-cycle. I call it a pre-cycle just because it occurred in a sideways gold move and can only imagine what will happen as gold sails past US$800 in the 12 coming months. Lastly I have a list of explorers and add recent floats to try to keep up to speed with this fluid market sector. Many of these grass roots explorers will be of interest much later however some of them with promise and good management climb up to Mid Tier status each and every quarter so they are worth watching.
We have a generous offer on this product too, immediate delivery during the update month of each quarter gives a free issue anyway but with the annual AUD$99 deal now running out fast you get an additional yearly subscription on top of this… 5 quarterly issues or 15 months on top of instant delivery and one free uranium report as well. Only 60 places left at last count, go to www.goldoz.com.au if this is of interest to you. To compare the last issue with the new one is an excellent comparison… the price differences are set 3 months apart so the movement is clear. This is an excellent analytical tool for market watchers who are happy to make their own choices.
Summary:
We still believe the ASX needs a rest but short term trading is still paying good returns for the brave.
Fx - leading trader says yes USD is in a down trend but it is orderly, look out for a false break to catch over eager USD bears… beware the currency trap.
Important - essential data available on FX and the metals, only for Newsletter subscribers - especially important for all exporters, miners and investors or traders.
There are major changes in the gold world - at the top end of the market.
Gold and silver possible near term upside but work to do, targets provided.
Larger ASX resource stocks showing broad and high RSI readings - supporting the thesis that a short term correction – read that as buying opportunity is near.
The smaller cap stocks are bubbling along and looking to have brilliant second half prospects after an excellent recent run.
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.
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