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Strong Performance - Giant Gains Achieved

By Neil Charnock      Printer Friendly Version
Jan 12 2009 12:51PM

Normally I would be writing a projection for this year as my opening article however we are still in un-chartered territory and I believe it is still impossible to call the markets with any level of comfort at this time.  Money flows have already been directed at some of our gold leaders – cash flows out of the good old USA.  More on performances below as indicated in the title of this article.

Last year humbled gold investors and precious metal investment writers as gold stocks sold off to previously unexpected levels - as deflation of the stock indices and most assets took hold amongst record levels of volatility.  It humbled us and yet we expected the cataclysmic events to unfold in the financial system – what we did not expect was the level of punishment handed out to the gold equity sector.

At GoldOz we have long expected a lengthy bear market in general stocks and a long term bull-run in gold and we have not been disappointed as yet. We have not changed our minds since we invested in gold stocks back in 2001 and physical silver back in 2003. I started work on GoldOz back in 2005 because I was convinced the financial markets were in terminal condition and because I believed in the Australian gold sector. I took my profit in silver in March this year and bought back some at AUD$13.80 about 11 weeks back – so far that was about the bottom.  I will be buying more that is for sure and I will keep on buying gold too.

In Australia we have a few listed gold majors; several very well run larger gold companies and many highly undervalued smaller situations right here right now. We have several world class gold deposits, brown-fields opening up and vast untapped opportunity in Australia. You could say we have a modern, vibrant, high tech gold industry and you would be right.  I have just completed updates on these stocks and provided a short list and even a new investment tool which grades the performance of these stocks in the Gold Members section of our web site.

Gold and silver will do well over the coming years and there is a high probability that they will do well this year. The Australian gold sector has performed as well as the HUI since the stocks bottomed in October and November (some details below). The stocks have come off a lower base here in Australia than North America and I believe they have similar if not more potential upside. We have a relatively stable financial system and a stable political system. 

It is useful to look back a few months at this time and then to look at the spectacular run in gold stocks in percentage terms over recent weeks.  We do this to assist us to find the next group of market leaders.  We are currently seeing a minor pull back which I did expect and had announced this to my consultancy clients in the last week.  I will be watching carefully to see if this pull back; follows through on the down side, returns to an important base completion or confirms a longer term trend change.

Recent History

In the forth quarter of last year I was searching for a bottom in gold stocks and looking for a strong tradable bounce. I had indicated to my private clients that the large gold producers would lead the way and a select group did just that launching upwards from August and October.

I penned an article back in mid November announcing that gold stocks in Australia were spattered all over the floor and noted that the bargains were stupendous and that it was the best investing environment I had seen in years. In September and October I had announced that I was running out of time to complete my updated analysis on this sector before the bottom hit.  Here are a couple of excerpts from my articles at that time.

Sept 2nd – I announced that buying patterns were changing – bottom line of article; I have been engaging in some interesting research for clients and building new style PDF files with complete chart sets. This has been revealing too as I view these chart patterns while I search for an end to the carnage in this sector and the ultimate in leverage to rebuild my portfolio.

Sept 23rd - Watching and waiting to pull the trigger on gold stock trades at present reminds me of the Westerns and war movies I saw as a kid. Sitting in the trenches with the command – “wait till you see the whites of their eyes before you fire”. There was never a truer saying applied to the current situation – shoot too early and risk a painful miss and the enemy is capital destruction.

This is an awesome climate for gold and silver and the shares that produce these metals will have to take off at some point soon.

October 7th – “The AUD has fallen from US98c to around US70c in under 10 weeks. Offshore vulture funds are gathering capital to pick the bones of the oversold assets. I said the UK Pound would appreciate against the AUD and got that right. When the USD was at 74 I stated it would rally and very pleased with that call too.  The larger producers look just as badly “out of alignment” compared to the gold price. Technicals are improving – however the juniors still look weak.

When the dust settles and we can see the whites of their eyes it will finally be time to stop playing and time to pounce for longer term leverage that will be spectacular. I see clearer indications the end of their fall is in sight.  I will continue to trade this environment short term and will try to stay in touch – for now my progress on deeper research is paramount in preparation for the turn around in the Aussie gold sector. I believe I am running out of time so I am working 6 days a week and most of them long ones.

The Australian mining sector is spattered all over the share price floor and the bargains are stupendous if you can work out which stocks are going to survive. Cash, cash flow and profitability are key – so watch the cash costs. The “disconnect” between the AUD gold price and the price of these stocks plus the low level of the Australian Dollar provides an investment climate of a life time. This is a global perspective.

This market has been disorderly and the gold stocks are still under pressure despite the rise in the AUD price of gold and the strong fundamentals for gold. The emerging producers have been slapped again recently and unfortunately rolled off a potential bottom consolidation. I have warned that only bottom fishing was to be attempted here and only by the more experienced – but have to admit I remain surprised at the severity of the forced selling. I still maintain this will be seen as a buying level in this sector when viewed with hindsight in future.

Gold stocks are too cheap – some are brilliant investments and will appreciate over the coming weeks…” 

OK – that is enough of this – lets look at now and then we look forward.

Present time

Since I released those articles the vast majority of our gold stocks have jumped in spectacular percentage terms. They mostly made their lows in October and November as set out below. Some have since risen as much as 660% from those vastly undervalued lows; however the average has been more like 80% - 150%+ even in the largest producer category. Potential trend changes have occurred in 18 stocks which have made new 3 month highs – 7 in December and 11 during January.  Confirmation is now required as we move forward.

I have begun an in-depth analysis on 39 specialist precious metal producers here and found 3 stocks bottomed in August, 18 in October, 14 in November, 1 in December and 3 so far in January. More than half the stocks have not made new 3 month highs indicating they are not potentially in an uptrend as yet. Most of these have however made at least 100% gains on their lows indicting just how severe these stocks were sold off. Those investors that had the nerve to buy the October and November lows have made spectacular gains.

We have entered free data in GoldOz Investor Education / gold stock quotes section which shows the 2008 high, the 12 month low reached and the recent 3 month high along with the date when this occurred.  Deeper research is now being added to the Gold Members area because things are now getting interesting again at long last.

Looking forward

I see industry consolidation and choppy trading this year with a possible strong uptrend if gold stocks do finally disconnect from the general stock market. In any case there will be further chances to pick off 100% gains in this sector and better if you get your timing right. Why?

The gold stocks are going to remain volatile as funds will sell into rallies and they tend to all trade the same way at the same time adding to the volatility. Funds have blocked redemptions and need to ‘grab’ liquidity on any sign of strength so they can pay out dispossessed and or disgruntled investors. At the same time there is fantastic value provided gold can hold these levels. Another positive is that many costs have fallen.

Diesel is well down and wage pressure is off a little thanks to weaker base metal prices and a down turn in this mining sub-sector. I see the release of excellent production and profit levels from the premium gold producers and the strong growth stocks Down Under in the coming weeks. This will be time to look out for those P:E levels and the growth news.

My opinion is that the technicals will continue to improve and a select few companies will do extremely well. I expect that a select few of the 18 stocks I have identified have already bottomed and begun their new longer term up-trends. The rest of this group will continue to base out and this creates additional opportunity to pick off absolute bargain basement levels.

Some of these stocks will also benefit from take over activity picking off plum deposits with strategic synergies. They will benefit by purchasing at excellent value and by adding production for their mills to either increase grade or exploit spare capacity.

The stocks that have not yet made new 3 month highs have more work to do and represent greater risk – there is need for greater caution in these stocks. These stocks have disappointed their shareholders because they did not participate in this useful rally – once again highlighting the need for strong research and technical analysis. Yet even some of these have already indicated that they are ready for a run – strong technical indicators are flashing on just a few that are starting to look interesting.

A word of caution – do not fall for ‘apparent’ value at this time as more companies can still go to the wall. An investor recently contacted me and mentioned a list of troubled stocks that looked cheap to him, and they are – the question is however – will they survive at all? The inexperienced investor or those with a gambling spirit can get caught this way.  They see very weak stocks and fail to connect this with danger.

I prefer to invest in the larger stocks that have confirmed short term up-trends and watch the current correction for confirmation and indications of a longer term trend reversal.  Some times paying more is a safer way to travel and more satisfactory in the long run. Just below this level is a group of emerging gold companies with even greater upside and I like to deploy some capital in this exciting area. This is also why I cover these stocks and identify them for subscribers in my deeper research tools – we all love the bigger returns.

Good trading / investing.


Neil Charnock



GoldOz has developed a Members area to assist with investor research in the Australian PM Mining sector. This replaces and upgrades the former PDF series.

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.