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Buying patterns have changed

By Neil Charnock      Printer Friendly Version
Sep 2 2008 11:18AM

Well we just finished the Olympics and much gold has been won – but congratulations to China for an excellent job well done in addition to their stellar athletic achievements – and to the USA for their medal haul and achievements.  I love achievement and my congratulations to all the athletes and supporters involved from all nations for their hard work and amazing performances.  Hard work and persistence does pay - down at the “stope face” we continue to see these same phenomena in progress Down Under.  I have some local news for you first however – news on our local economy.

Local news
Australia’s current account deficit fell sharply to 4.3% of GDP for the June quarter and the main reason quoted was strong commodity prices followed by falling imports from the rest of the economy.  This comes to hand just as the Australian Federal Reserve Bank has widely broadcast that interest rates are on their way down here and a drop is expected tomorrow.  This is a prime example of what I was talking about with my comment about “news” recently.  This news gets released weeks after the end of the quarter and only after the AUD has shed about 12% of its value and usually by the time news is out things are about to change back again.  That is with short term trends and “official figures” as markets are kept guessing. 

The alternative investment cycle
It goes something like this – first you see the technicals changing – then you get the move – then you get the news.  The fundamentals have to fit of course and can come before or after the event however they are usually there before the event supporting the eventual move.  This is what the news reports on – if they are not making it up as they go.

Commodities have corrected and now we get the news that high commodity prices have caused the improvement in our terms of trade.  Just as the worst of the news comes to hand the market is ready to reverse again.  The latest on China since the end of the Olympics is that credit restrictions are being eased for a new growth phase because inflation is being viewed as less of a threat (because commodities have come off).

Nuts and Bolts
On July 1st I penned a comment about the Australian dollar and it had implications for offshore investment flows into Australia – “Offshore investors have the exchange rate to consider and I leave this evaluation up to you. Should the Aussie dollar turn down then it is in the interests of offshore investors to hold off until we see corrections to the down side – this would offer a potential currency gain as an additional bonus”.

I was close – the top at 97.94 was recorded two weeks later and just above the price where my comment was made.  The AUD corrected heavily and now stands at 85.35 as I write.  At some point it will be massive offshore inflows that fuel the coming gold stock boom here in Australia – the currency threat has now eased in the short term again and our stocks are getting bid at least a little once again.  The buying patterns have changed.

It is not that Aussies are stupid, gold barely began its rise in AUD terms 3 years ago – gold is mostly not on their radar as yet and most cannot see what is coming.  The gold sector here is small even though our miners have operations across this resource rich continent and the globe – silver, PGE’s and gold as well as diversified resources.

Just looking at the charts below though – prices have stabilized and started to turn back and price behavior has changed too these past few weeks since I announced a bottom was most probably in.  Firstly take a look at the current AUD gold price chart.

We have seen a muted price drop in AUD terms as the Aussie Dollar itself fell in line with our predictions.  Now proof the buying patterns have changed and please note – it bottomed back a week or two as I indicated we have reached the approximate bottom.  In particular I pointed out the emerging producers and the price crash has indeed halted – for now - or is this bottom?

I feel a bit like a broken record here however the message seems to be getting through so I will keep this simple.  I am going through upgrading and updating my company research and am still astounded at the many of the current incredibly low stock price valuations.

I am talking about valuations so low you would think gold was still $260 an ounce.  One stock I came across has investments in other companies that are larger than their own market capitalization – go figure that one.  A CEO I spoke to today was actually in apathy of sorts – but only about his share price because their own progress is going “gangbusters”.  He was reluctant to release good news – brilliant news because every time he has for the last few months the market has hammered his share price.  They are increasing production 8 fold, have delivered fantastic grades on their development ore and are getting more aggressive on development expansion.  This company is set to be a mid cap producer in the very near future, at a reliable fully operational plant and has a market cap under $40M – amazing. I am looking at developers with almost as high a market cap – with one third their resource and no plant or funds to move forward.

Cash is being raised within this industry – gold is in demand and banks have cut back on risk so they are looking for quality investments which are harder to find now.  The same goes for investment capital from institutions and private sources.  Quality mines and resources actually still have a choice and are shopping around for the best deal – they will get their finance.  Try to buy over priced property without a very large deposit and you will not enjoy the same conditions.

Another developer has a market cap of only $12 M and has nearly 1 M oz of gold and a plant – but no production at present.  Numerous stocks with multi billion dollar in ground resources at under $20 M – another favorite developer with about 1 M oz gold and a great ground position has been hammered from $1.25 to under 30c.  This is not an uncommon story – quite the opposite.  Such is the sentiment – nobody wanted these stocks on the way down and sellers that wanted out had to take any price they could get.  You would swear there is no gold rally and the AUD gold price had fallen below viable mining levels however this is clearly not the case.

And how about the established producers – how have they performed this last few weeks?  Well here is a chart so you can see the picture for yourself – MACD has reversed, the histograms are now positive and RSI has turned up.  This is the deepest correction in five years and gold is in demand – the probability for a successful trade is looking very high to me at this point in time.

Thanks again to Nick Laird at Sharelynx for his awesome un-weighted charts (read this as – not distorted by one or two high cap stocks that dominate a sector).  Is this the tentative beginnings of a turn around in Australian gold stocks?  Do we bottom out for a time here or complete a powerful “V” bounce correction as if attached to an over stretched elastic?  I honestly think the former is true however I have begun to buy just in case the latter is more accurate.

Given the extreme under valuations and seasonal timing I am now placing trades for this eventuality – trades in gold stocks.  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.

If you have interest I have excellent product guides – the stocks all sorted and the product is very cheap to buy.  We have been updating the stock quotes, brokers section and have sorted the navigation at our site for the benefit of all – you are welcome to visit.  Australia is a vibrant modern mining centre of global importance – sovereign risk is low and valuations are low.  Your choice is “do I take advantage or not”.   When and not “if” global gold stock demand becomes strong enough it will rush at all gold stocks across the globe and the late comers to this party will deliver the best returns of all.  I hope you have gold and gold stocks when that eventuates.

We are currently advertising a gold seminar at our web site – for all Australian investors that are within reach of Canberra this is worth a look.  For any visitors to our fine shores in November you might like to come along.

Good trading / investing.




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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.