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Gold & Gold Stock Opportunity Analysis

By Neil Charnock      Printer Friendly Version
Aug 21 2008 10:45AM

I have been searching for the bottom pattern in gold’s current correction, and the level which is even harder. Bottom picking is both dangerous, if you deploy capital, and extremely difficult which is why I caution against it. Buying a sharply falling price is like catching a falling knife. It can cut you and even if you do catch it cleanly you must not let go as it may land directly on your foot.

So we wait and watch for the turn signal which indicates the trend has changed providing the ideal time for investors to enter this market again. Some I know are averaging down now buying highly undervalued miners on any price dip.

One of my contrarian contacts is an extreme sort of a chap and a successful futures trader – he is highly intense and intelligent and represents the ultimate contrarian’s contrarian in my opinion. Back in December last year we discussed lows and a 400 dma support level breached by a favorite diversified miner here on the ASX. I was looking for a bounce at that time and got it in that stock; he was looking at the overall market however and expecting the lows to continue to fall away into May this year.

But importantly he saw significant lows even earlier last year during this period and was right. William also saw a broad recovery in resources across the boards after this and the beginning of a new large scale commodity up-leg.

Most investors are intelligent and this is actually a trap of sorts – the obvious investment position is usually easy to take and usually wrong too. Just when it looks highly likely that the market will move in a certain direction – like lagging gold stocks at the beginning of the third quarter last year (gold surging higher) – it does the opposite. We could see gold headed higher and knew equities were out of fashion yet logic dictated that these stocks would follow. They didn’t and when gold turned down they still kept falling past support levels and over shot any perceived lows to the horror of longer term holders.

Gold just did the same thing overshooting predictions by many analysts, bottom pickers were out in force and the world was “too long” so it has to unwind according to an associate Colin Emery. I have been caught by false break outs before and even though there was excitement at the POG heading back towards that $US1000 level – I did not buy it – not yet.

I speak regularly with a silver trader who got carried away and thought the $16 level was the final support – but I warned him that I saw $14.50 and to leave a low bid in for the final sell off. My prediction was too high in the current volatility as even this “unthinkable” low (unthinkable to him and many others at the time) was overshot strongly. Silver is extremely volatile as the initiated regular market watchers all know – it always overshoots in both directions. Back to gold for now…

300 DMA and 20 month moving average – long term supports

My colleagues and I have written about the 300 dma for gold and how this moving average has supported the price of gold throughout this bull market. I sent a chart out to subscribers last week which showed the 20 month moving average on the long term chart and gold has tested this level several times since 2001 – well it just happened again. This average was tested and did support the price yet again.

For a different take – here is a GoldOz colleagues take on the 19th August – and his comments from the 12th August below the chart…

GOLD - Comex JUNE 08 – Daily

From the 12th August comment when gold was testing $US813: “in fact at best I think we are in for some sideways trading consolidation – at worst we will test these major supports – line 5 and line 7 – and the major long term trend line 6.” Well the knife was falling and Colin was right on the “worst” case scenario, it did subsequently fall to support line 7 with the potential to still fall to line 6 in the coming weeks.

Now summer in the Northern Hemisphere draws to a close – Fall is in the air as the leaves brown off and in the Southern Hemisphere winter draws to a close – Spring is in the air. This is the season of recovery for precious metals well documented elsewhere so I see no need to go over that ground here at present. September is the turn point and this is logical however there are no guarantees. With the US election looming we may have to wait and this will fool some investors into thinking that a recovery is not going to happen this season. However like late monsoon rains – the recovery will swing back again - why?

$AUD935 gold – right now

Gold and silver are deeply oversold, the shares even more so particularly the emerging producers. Depths not envisioned by most if not all now scream – “buy me”, that is if you believe the fundamentals and long term trends are still in place for gold.

Some of the base metals have become highly attractive too. There are repeating divergence patterns in stock markets indicating to this analyst that a turn is approaching in sentiment – it seems impossible but resources and precious metals will recover. Just as the worst of the financial results are being reported this year and things look as if the commodity boom will surely end – we will all get a surprise once again. I refer to mining and precious metals not real estate or the US economy.

Gold stocks did not follow gold up into that initial $US1000 + high and they were hammered further as gold subsequently fell. They did not follow the false break to $US987 either and then got hammered even further shaking gold stocks from all but the strongest hands. The buying patterns are now slowly changing which is what turns the RSI indicators and creates the divergences – this is a give away that the worst id over now for some stocks.

Many of these miners have been making significant progress towards increasing production and tangible results are imminent or already in place “at the stope face”. The markets will most likely bottom due to this confluence of occurrences (including the over sold condition of the physical metals and mining stock indicies) and strong hands will soak up more and more paper at these levels.

Progress at the mines may not be recognized in the share prices until results are reported – after the fact – but the smart money knows this and is picking up fallen and low lying fruit right now.

We now track the share charts closely on my PDF files which have evolved significantly since I released them two years ago – yet they are still too cheap. Patterns are emerging and market timing will be assisted via this process. The market too – is highly fluid with company failures (some sadly fatal), new emerging companies on the scene and takeovers – this takes more time than the average investor has to keep informed about. Turn your radars on now because he who hesitates is lost for the lowest prices - but be careful on your choice of stocks – and patient on your entry levels.

Media Disgrace – here we go again…

Direct from the same people that aired all the “get rich through real estate” and “renovate your dream to make money” schemes over the last 2-3 years here in Australia.

I just witnessed some absolute drivel on the television where a spokes person from a “wealth building” magazine was promoting dubious information. The blurb was simplistic rubbish and finished with the astounding statement that “It’s never too late, and never too early! A dollar today is worth a lot more than a dollar tomorrow, so I would start saving that dollar pretty fast!”

If she had explained herself it does make sense if you think about it – she is saying that the dollar will devalue. Actually good advice - however she fails to point out that the dollar saved - as she suggests - is currently suffering from negative real interest rates! That is right the dollar saved is losing value because inflation of goods and services is running at a greater rate than interest rates paid on those savings.

That dollar saved is good support for the Banking industry as a deposit (reserve requirements) however it is a losing proposition – guaranteed! The concept of putting something aside is sound however and if handled correctly is an excellent wealth building exercise – however you are unlikely to become wealthy from this activity unless you invest very wisely over the long term and achieve stellar compound results.

The stupidity of the statement also lies in its isolation from an explanation of inflation - and how to invest in something that will preserve that saved dollar so that it has a relatively increased value in the future. She had just talked about real estate and Super Annuation, the realm of the modern sucker – this garbage is literally “slops for the masses” – “bread and circuses” as it was called in ancient Rome. It is only good as entertainment value.

She promoted house ownership and also Super Annuation based solely on taxation merits at 15% even if it is the hands of inflexible super funds that can only invest in bank stocks, industrials, property trusts and the “like” and real estate. Great timing eh? Yeah “top advice” – real estate is set to stagnate at best here in Australia and at worst will fall dramatically at least in real terms (that dollar again and it’s relative value). Excuse the outburst but I thought these guys had all but finished this expert “advice” on how to get rich. Discipline and research and hard work are the road to wealth these days, and business ownership however only if you are extremely successful. At this stage I firmly believe gold stocks are a great medium term investment, so is bullion.

Gold and silver are real money so don’t buy the illusion, get some – save in bullion - and get the real thing, not paper, if you can!

Good trading / investing.


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 his current opinion only, further more conditions may cause these 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.