Why Gold Will Break Above U.S. $1,000
Commodities / Gold & Silver 2009 Aug 17, 2009 - 03:16 AMBy: Neil_Charnock
This title should also read “and why gold equities will fly”. At GoldOz we have successfully predicted the Price of Gold (POG) movements on a fairly regular basis the past few years. This is a bold statement backed up by public record. The long consolidation patterns in the POG in between the strong up-legs have been quite regular since 2002. The extent of each price rise has been harder to predict however so we steer clear of this claim and prefer to follow the market until it “feels” and acts like a top.
On balance the leading gold shares as a group have tended to under perform near POG market tops. They form exhaustion patterns and give the game (top) away as sellers move in and take profits. These have been the ideal times to sell and walk away and this takes discipline above all because these are also the times of greatest excitement. The up-leg advances have become stronger as the long term trend has progressed.
The key is that the trend remains on track and the new high POG consolidation around the US$860 to US$1,000 range is setting up a new high launch level much like the 5,360 metre base camp in Nepal on the way up Mount Everest. Climbers typically rest at base camp for several days for acclimatization at the new altitude and gold needs to do the same because investors need to get accustomed to the progressively higher price levels before they can gain the confidence to launch on mass into each successive new rally.
We believe the launch will happen sooner rather than later and that this time the Australian listed gold equities will be propelled upward in spectacular fashion. Most of this sector has not had a decent run since the H2 2005 rally and it is time again. Share price action is suggesting this is a correct thesis at this stage. New fear last night in the USA produced a modest rally in gold stocks here on the ASX today amid a general fall.
The drivers of the POG have been varied and much has been written. Because gold is not consumed and has been produced for 1,000’s of years I do not necessarily adhere to the supply and demand thesis that focuses on yearly production. My point is that new gold supply from annual mine production compared to total historic reserves is fairly minor in a mathematical sense on a percentage basis.
Silver Comment
GoldOz also has interest in the other precious metals. Silver supply fundamentals are vastly different to gold because we have consumed much of the known historic stockpiles. Recently the gold silver ratio has been dropping. This is bullish for the price of gold as it can indicate an upward price break is near.
Remember also however that 80% of silver is produced as a by-product of copper, zinc / lead and gold production. As some of the new base metals projects from 2007 onwards were put on hold the forward supply of this vital metal was reduced. New uses of silver continue to emerge and the price outlook appears bright at this stage.
The Major Forces at Play
I do believe gold supply is a significant factor however one must differentiate between total supply and available supply. How much gold is on the market for sale at any given time is the issue. As investors and Governments hoard gold the total available historic supply drops. When combined with other related supply restrictions this becomes significant on a cumulative basis.
Other supply factors include reduced Central Bank sales, accelerated hedge book reductions; mine closures, long lead time to bring new mines into production and geological rarity.
When looking for significant price drivers however demand is another factor altogether. This is where the POG can really get up and moving with force. Investment and monetary demand are intense as unstable financial conditions and currency stability issues have moved to the forefront in recent years.
As global fiscal stimulus packages roll out the money supply is increased progressively across international economies. Foreign reserves require a hedge to a greater extent during these conditions and gold is ideal for this monetary purpose. Bankers and Governments are learning that gold holdings should be a permanent fixture of their monetary policy. Gold is essential in the monetary system as a stable tangible asset – it has a balancing roll to play because it maintains value over time.
Fund managers, wealthy individuals, corporations, banks and cumulative smaller investor demand all combine as a major force to drive price. The POG consolidation phases are characterized by profit taking and accumulation at each level.
Government purchases, ETF investment flows, coins sales, new markets such as China and other significant demand factors all add up to an accumulated appetite which exceeds available supply and launches the POG upward.
The drivers that launch each new up-leg have evolved throughout the past 8 years and this will continue. Fear is a powerful driver. It is said to be more powerful than greed. The nature of the demand driver of the next major POG up-leg will determine how large the rise will be.
There have so far been a number of drivers however during any one POG rise. The last magnificent rise to the US$1,030 level was fear driven and the strongest percentage gain in the POG for the entire rally to date. Global financial stability issues, in particular banks in the USA drove the price to these levels and despite the “so called” recovery to date we have a persistently high POG.
Does this high POG price persistence indicate we have not yet completed this difficult financial period in history? Does this indicate that the worst financial crisis since the great depression in the 1930’s has further to run? Could it mean that we are looking at something worse? These are big picture questions and will not be covered in this article however the answers are yes, yes and yes.
Currently the US shorts are at extreme levels and should be closed out by this time of year. They are usually safely closed out by now however they have not had a decent exit point to date this financial quarter and remain short at dangerous volume. If the POG shoots upwards soon as I suspect we will see a monumental short squeeze. This would not happen without a serious battle as both sides have deep pockets. There is risk we see down side initially before a blast off in the POG due to this factor.
I see the extremely difficult conditions in the global debt markets as the next major driver or at minimum a major factor. This would be unfortunate as fear will again return and with it a second down leg to this crisis. Of course knowing how this will play out is another issue and key to investment positioning.
Gold Equities
Whilst I certainly advocate that investors hold physical gold and silver there is also an exciting opportunity at this point in history. Equities have recently followed a pattern similar to the 1970’s where there was a slow start in the early years followed by a pull back in 74 – 75. Gold had moved up strongly by that time and had then experienced a correction phase. Then the equity price action changed. Share prices moved up starting slowly at first in 1976 – 77. This preceded an explosive rally that took some stocks from well under $1 up to $100’s. The returns were stupendous.
Given the gravity of the problems in the debt markets and economic pain yet to emerge in this down cycle I see no reason why things will be too different this time. Will the gold equities continue along their own path dislocated from the broader stocks Down Under? As a commentator of the Australian Gold Sector this is an important question for me. I have written articles about this phenomena and how this has been the principle gold stock behavior since October 2008. They are going their own way quite separate to industrial, insurance, property and bank stock behavior and no wonder.
I have been writing about how I have been expecting a down turn in the ASX Gold stocks for several weeks and it has been a flat correction on balance. This is a significant observation. Like physical gold – gold shares are being accumulated. One technical pattern that confirms this is the RSI and price patterns on the Gold Producers Index chart as shown below. Note that price is firm whereas RSI has pulled back consistently for several months.
This is bullish to say the least – think about it. Relative internal strength has been falling and yet the stocks have been bid consistently over a sustained period. They have been bid consistently enough to maintain share price levels. The highly undervalued sub-sector represented by the Emerging Producers chart at GoldOz shows a similar story and the Gold Juniors Index shows rising prices during a period of consistently falling RSI.
This may well be attributable to the fact that savvy investors have been quietly accumulating these stocks. They are undervalued and illiquid so gentle accumulation is required to accomplish such a feat. Some of the specially selected GoldOz Gold Members Explorers have marked very strong gains in the past few months.
Time is running out for accumulation of all these stocks at these levels. We have the radar on and looking at these levels as extremely attractive for many of these stocks right now. Time is running out for cheap gold and silver purchases too.
We view gold and silver in historic inflation adjusted terms and they are very cheap – don’t be fooled by precious metal prices quoted in 2009 dollar terms. The upside potential is great from here, when gold breaks US$1,000 many people will be shocked. Savvy investors have accumulated metal and stocks on each pull back and near the end of each consolidation phase in this Gold Bull to date and I suggest you might consider joining them.
GoldOz presents news summaries, chart sets with technicals, technical performance tables and now we have introduced a new Gold Company Rating file for the gold focused ASX Producers and Developers. This last research file is free to Gold Members however any investors out there interested in prudent comments and the important facts on 58 of our gold focused companies can buy it at the GoldOz Store for only AUD$25. The companies are rated and this investment tool shows the undervalued plays and profitable stocks in one easy to follow format.
Access to our Gold Members area is offered at discount price with bonus time for a short time only and then the price goes back up. Timing conscious investors might like to take advantage of this too – annual Gold Membership is currently $250 ($45 off) with a free bonus month, 6 months $130 ($30 off) with 2 free weeks and 3 months $80 ($15 off) with a bonus week. This offer will definitely close soon as we now have our Gold Members area up to a standard that offers great value at higher price levels.
Good trading / investing.
Regards,
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 |
© 2005-2012 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
Comments
Post Comment (Moderated)