Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
Will Biden’s Neo-Populist Economic Doctrine Support Gold? - 25th Sep 21
Markets Deflationary Winds Howling - 25th Sep 21
Crude Oil Price Piercing the Sky: Where Will We See the Black Gold by Xmas? - 25th Sep 21
Cryptocurrency policy choices and consequences - 25th Sep 21
The Next Emma Raducanu UK Tennis Star Pleasing the Crowds at Millhouses Park Sheffield - 25th Sep 21
Stock Market Rescued by the Fed Again? - 24th Sep 21
Are Amazon Best Cheap Memory Foam Mattresses Any good? Bedzonline £69 4ft Small Double ECO Example - 24th Sep 21
Evergrande not a Minsky Moment - 24th Sep 21
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Essential Gold Stock Analysis

Commodities / Gold & Silver Stocks Jul 27, 2009 - 10:41 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleAustralia is a major gold producing nation and a stable political environment in which to operate mining activities.  The global interest in our sector is significant and we have seen massive capital inflows into the sector during the past 18 months, both during and in contrast to very tough international credit / investment conditions.

My current thesis is that any correction in the general market will take the gold stocks back with it initially but not as drastically as during the 2008 fall.  Also - the smaller gold stocks are cheaper when compared to the larger companies right now so any fall takes them back deeper into “Alice in Wonderland” valuations.  I see the gold price breaking US$1000 later this year and generating a gold equity rally which has the potential to produce windfall profits for participating investors.

Australian gold stocks have moved strongly since the end of the 2008 rout when share values were slashed viciously during the final October 2008 stock panic.  The strong December to February 2009 period was a strong indicator that better things are to come as these stocks visibly disconnected from the rest of the Australian stock market.  Let’s take a look at the chart below to show what I mean.

The XGD (Australian weighted gold index) is in dark blue on the chart above and the general stock market index (XAO – also weighted) is in light blue above.  First notice that they crossed over with the XGD taking an upper / stronger position on the chart.  This means gold stocks went from under performing to over performing the general stock market in late November 2008.  The XGD has maintained this behavior to date with minimal public fanfare to date. 

Now notice I have added a series of rings running up the chart through November 2008 which was the turning point and cross over area.  The XAO made a lower low during late November and the XGD made a higher low before that reversal - signaling strongly divergent behavior between the two indexes.  The XAO eventually made its low (to date) in March 09.

In early 2009 I have three overhead trend lines running up the chart on the MACD, the RSI and price showing where the XGD leveled off after divergent top formations.  The MACD and RSI agreed however they both disagreed with price.  Then price leveled off and began to range – nearly 8 months later this still continues.

On the right hand of the chart I have circled price and RSI to show a potential minor reversal pattern but I am not at all convinced that the time to buy is now.  Deeper information on this subject is only for Members but I can talk generally on this aspect of our analysis in this article after I point out an essential aspect of our market indexes first.

About the Indicies
Investors should understand something crucial about these indexes on the Australian stock exchange.  They are weighted according to market capitalization which means movements in the very large stocks move these charts in a disproportionate way – unless you happen to have a matching market cap weighting on your own share portfolio. 

The XAO Index is dominated by the four big banks ($205B), BHP ($121.4B), Telstra ($42B), Woolworths ($34B), RIO ($33.3B), Woodside ($30.7B), Wesfarmers ($28B), Westfield Group ($25.9B) and QBE ($20.7B).  The other 200+ stocks that make up this index represent the left over proportion of the index.  A strong fall or rise in one of these will distort the index giving a false view in a sense – because it not representative of movements of the smaller stocks in the index.

The XGD is currently made up of 27 gold companies that also fall within the broader Top 300 Metals and Mining Index (XMM) which measures our vibrant Australian Mining Industry by covering the top 300 companies.  So the XGD is a sub-sector of the XMM.

The XGD stocks are also drawn from the XAO top 250 stocks and are also dominated by the lager gold miners such as NCM - Newcrest ($14.98B) & LGL - Lihir Gold ($6.86B) – to a lesser extent CNT - Centamin Egypt ($1.8B), Sino Gold ($1.53B), Anglogold Ashanti Chess Depositary Interests 5:1 ($870M), Andean Resources ($730M) and lastly Kingsgate Consolidated ($682M).  These market capitalizations expand and contract with rising and decreasing share price so the relative dominance or insignificance of individual companies changes over time.

The smaller stocks can languish during a time period of a rise in the larger stocks in this index and not affect the overall performance of the XGD.  Also the smaller stocks can be moving up steadily while the lager gold stocks trend sideways and you will get very little movement on the XGD.

Thus the XGD is not a clear representative of the smaller stocks and while the XGD may look overbought you can also have significantly undervalued smaller stocks at the same time.  This is why I have included the Australian Gold Producers chart below – to show the real level of a representative of the smaller gold producing stocks in Australia.  This assists us to assess the current value of this sector in real terms.

While we currently see the largest producers with P:E ratios up over 35, the smaller producers are much cheaper even with some costs having fallen and the gold price in AUD terms remaining at profitable levels.  I have identified 6 small producers (higher risk) with P: E ratios from 1.5 to just over 6!  Several other smaller and larger producers have been moving forward towards a positive balance sheet and long-term viable operations – these are also undervalued by several valuation metrics.

Realistic Gold Stock Levels
Perhaps a better way to measure the gold sector here is an equal weighting of gold stocks from the producers, emerging producers and junior explorers indexes as prepared by a leading web site owner Nick Laird of Sharelynx fame here in Australia.  Nick has kindly allowed me to present three of these charts going back 5 years in my Gold Index page at GoldOz.  Here is the Producers Index chart as shown at GoldOz - additional resources (vast) are available at Nick’s site

The difference in this chart compared to the XGD is startling and is all because it is not weighted on market capitalization.  The price performance of all gold stocks is treated equally in this chart.  The real top (in the May 2006 gold peak) when viewed this way emphasizes the fact that all the gold stocks accompanied the leading stocks in a strong rally back then - however the recent rally we have seen that the large stocks moved largely on their own to out perform the rest of this selection of 20 companies. 

Again in late 2007 and early 2008 we saw a significant peak.  When you view the NCM chart below you will note it made a much higher peak in 2007 than it did in 2006.  I have circled the lows at the end of 2008, both on price and RSI to show the strong divergence that signaled the bottom was in on this chart.  This turn point is different to the XGD and a clearer indication of the low and turn point.   This point has significant value – we watch charts for technical indications and price clarity so the value of a chart is greater when measured by the level of clarity it brings.

On the far right hand side you will note two overhead resistance lines drawn in - showing a sell divergence is forming which may signal a down turn towards the bottom I have been predicting.  I do not expect the new low to be as deep as late 2008 as these gold stocks have been behaving differently to the general market for most of the past 8 – 9 months.

We do not cover the technicals or stocks for the general public in these articles and may not even be allowed.  I have selected 3 year charts of the top three gold companies by market capitalization to prove my hypothesis another way so I hope they are printed here. 

Please note that these stocks more closely represent the XGD (particularly NCM – Newcrest Mining) due to their dominant market capitization - however they vastly outperformed most of the smaller stocks as proven by the Australian Producers Index chart above.  Note the relative height of the 2009 highs (recovery from the October share rout) on the three charts below.

The leaders were our stated favorites at GoldOz however we did get an excellent surprise as the smaller producers, many developers and even the leading explorers came back strongly over recent months.

Bargains are abundant in the smaller end of the gold stocks in Australia and will get even cheaper over the next 2 – 4 months.  We may be at a minor top but this picture is unclear at present.

The XGD does show a useful map of gold stocks however we have a better map for measuring the broader gold sector at GoldOz – in fact three of them on our Gold Index page.  Our Australian Gold Producers Index shows the potential of a fall clearly and was a clearer indicator that this sector was bottoming in November 2008.

Global capital flows have favored the gold sector in Australia over the rest of the market – the gold stocks have outperformed and we believe this will continue.  The old rule of “follow the smart money” applies here – at GoldOz we are covering the best investments in Australia at this time.

A subject for another article perhaps – I have run out of time here this time – gold is set to go up later in the year.  I am highly confident this will happen and fuel the next Australian gold stock rally.

GoldOz Special Offer
We are concentrating on providing the best coverage and independent information we can on what stocks have the greatest potential to make massive gains and create share holder wealth in this rally and beyond.  We also work on timing guidance on a broad scale – of the index and our selection of gold stocks.  We run a basic list for Members and a shortened list for Gold Members to save time and educate investors.

We warned our Gold Members that gold stocks were likely to top out soon – this was back at the end of April and over the coming 4 weeks or so they did as shown in the charts above.  May ended with power and a double top on the XGD to our surprise and pleasure.  We stated that we did not expect a major fall and that we all had to wait and see.  So far it has been shallow – the Aussie gold stocks have ranged sideways along with gold since February.

We are now offering a subscriber special of $250 for 12 months access to our Gold Membership research at GoldOz – we will also throw in additional time so that annual Membership will last an additional 40 days - increasing the discount to 20%.  Six month Gold Membership subscribers can also sign up at a discount of 16% today - $20 off and 10 additional days – cost $130.  This offer runs out at the end of the first week of August so get in now if you are interested in making money on Australian gold stocks.  The first 10 subscribers will get an additional surprise bonus as well.

Good trading / investing.
Neil Charnock

GoldOz is currently developing a Member area and has added further resources for free access. We have stepped up our research and stand by to assist investors from all walks of life. We sell an updating PDF service on ASX gold stocks from only $AUD35 for 3 months – the feedback is grateful and enthusiastic because we are highlighting companies that have growth potential and offering professional coverage of the sector. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia , brokers, bullion dealers and other services.

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.

Neil Charnock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in