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Hot Gold Stocks, Drop Bears and Market Timing

Commodities / Gold & Silver Stocks Aug 24, 2009 - 07:06 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleShare price action has been patchy but exciting in many cases over the last few months.  We called a correction at GoldOz and were right for the overall majority of the gold equities sector.  However this has been a bit of a “drop bear” rather than a “bear market” type of correction – why?   Numerous hot “multi-baggers” in our short list on the Gold Members pages have performed strongly as their share prices doubled, tripled and quadrupled or better.

Off shore investors may have missed the joke here – Drop Bears are an Aussie joke intended to scare attractive women into our arms during picnics and camping trips or to trick unwitting tourists – a quirky Australian humour / teasing sort of joke.  They don’t exist of course – the Drop Bear correction has been like that too because of the strong performers.  Significantly these share price movements are a strong indicator of future action.  Gold stocks are still being accumulated Down Under!

Over the medium term gold stocks have been a great place to park investment funds during this long gold price consolidation.  Investment flows into Australia have been strong for the gold sector and as a commentator with a public profile I have been approached on several occasions by brokers seeking gold mines to buy for wealthy offshore investors.  The savvy money is getting set but I am far too busy to sell mines unfortunately.  This is another new and strong pointer to future share excitement.

Physical gold is also gearing up for a rally as it completes a long consolidation phase yet again – a pattern repeated several times in the past 7 years.  A high base has been formed and I am now franticly working to get the word out and to get the stocks we cover at GoldOz listed with their offshore codes on our investment tools as many are traded on the TSX, AIM and other markets.  This will assist our offshore Gold Members at GoldOz.

Our gold companies are active across the globe because this is a multinational business.  Gold is as important as it has ever been it is just that most of the investing public and investment advisors don’t know it at present.  When gold breaks US$1,000 they will start to question their current theory that gold is expensive now.  How wrong could they possibly be?

I believe the gold sector is still highly undervalued given the current gold price.  Current share price behavior tells me things will heat up considerably in the coming weeks as gold breaks out and upwards.  Seasonal timing also confirms my sense of dwindling time for investors to get set ahead of an exciting rally.  Any dramatic global economic shock remains a risk for higher risk investment classes like equities however so don’t put all your eggs in one basket.

Getting out at the right time is just as important as getting in at the right time.  Market timing is essential, taking profits is essential for successful market traders.  I publicly suggested in September last year that a low had to be close and followed up with similar comment in October and November as most gold stocks made their lows on the Australian market.  This was the ideal entry point however it is certainly not too late.

Of course at that time investor nerves were frazzled and risk seemed high at that time so pulling the trigger was not for the feint hearted.  It looked like the end of the world for equities and our precious metals sector had been hammered as hard as the rest of the market.

Economic Gloom and Doom

Numbers being released out of the US are not that pretty despite some frantic talk and a recovery bounce in the global equity markets.  The debt market is a major headache for us all including global businesses and banks.  Unfortunately this recent economic activity is an improvement compared to the economic collapse and vicious contraction of the last quarter of 2008 and first quarter of 2009.  Massive stimulus packages have worked to some extent for now but don’t get too carried away – the edge of the woods is still far away.

Thud I say as I pound the table with both fists – we still have massive deficit problems and growth will not come up to the expectations of the “all is better now” analysts.  Debt markets and lousy consumer spending are going to stifle growth.  The banking system must continue to rebuild balance sheets and factor risk in an extremely difficult climate. 

Risk must encompass negatives like the unemployment cycle which is just getting fired up and the fact that we have not seen the bottom of the real estate cycle as yet.  Mortgage resets, falling real estate prices, bankruptcies and other negatives will impact on the banks, businesses, consumers - and we are highly likely to see further corporate failure.

A double dip recession is more than just a danger in my book it is more like a probability with a highly likely tag.  Any further weakness or disaster has the potential to panic markets again because the memory and scars are too fresh - they will expect a rerun of the recent activity. 

Make no mistake the credit crunch is like a smoldering bush fire and the embers are everywhere, those trees still standing in the main are weakened and tinder dry even if they have a few tentative green shoots.  Any ill wind will whip up the flames and fear on mass all too quickly.

Emerging markets are less of a problem as they had genuine demand not overspending as their financial models.  Japan and Europe are still a major problem; emerging markets will not offset this negative on the global economy.  China is driving growth via stimulus and job creation – and stock piling base metals which is scary for this sector.  This is why we have backed off the diverse miners more and focused on the pure gold stocks – our niche anyway. 

This China aspect has interesting implications for silver because over 70% of supply comes as a by-product of base metal production.  We see all precious metal investment markets driven by speculative demand and since there will be less silver produced from base metal production due to diminished demand, or at minimum constrained increases in supply the price will be forced up dramatically.  Pure silver stocks of a decent scale are virtually non-existent on the ASX however I am a physical silver investor.

Finally at the end of the day we see that this entire Government spending and fiscal stimulus is inflationary down the track once this deflationary phase is over and prices bottom.  It will take years for consumer growth to catch up with all this excess production capacity and the game must go on so more stimulus action will be needed.  Tighten monetary policy too soon to reign in those deficits and you get serious problems – it would crush anything but robust growth. 

Why are Gold Stocks Different?

Inflation will remain a fear or at least a concern for astute investors because only inflation can handle the accumulated deficits in future years when things get back on track.  Inflation is likely in real terms as currencies devalue – all countries need to increase exports however all this achieves in the end is competitive devaluation of currencies in relation to gold and commodities – inflation.

These scenarios and events will keep pressure on gold, precious metals and gold stocks.  Fear is the wild card and is a real possibility due to the reasons I list above.  Something I have not listed above could come out of the blue and cause havoc – the unknown unknown factor.

I have written previous articles on the topic of the disconnection by gold stocks from the rest of the equities since the start of November 2008 – as shown on the chart below.  I have provided this chart again for comparison purposes – my thanks to BigCharts.

On June 9th this year we posted a comment for our Members and Gold Members at GoldOz – “Double top appears to be in now and correction underway”.  We were talking about the XGD which is the weighted ASX gold stocks index as marked in blue below.  It is made up of several producers and a few large developers.  Please note the second peak in early June which we alerted our Members about at that time.

XGD / XAO comparison chart -12 months

The red line on the chart is the XAO – All Ordinaries Index of 250+ companies on the ASX.  The strong rise over the last month in the ASX can be attributed to the big four bank stocks but again the gold stocks have been acting quite apart from the rest of the market.

The topping process of individual stocks is continuing as shown on our free pages found under Investor Information – Gold Stock Quotes at GoldOz.  Site navigation to find this resource is aided by our drop down menu on the tool bar at our home page.  This is where we have provided extensive pages on share price lows and highs for our public visitors.  Generally speaking the larger gold stocks moved up first to early 2009 then consolidated before some of the stocks we covered in our short lists in the Gold Members area headed sharply higher.  These rises extended through the ranks of gold companies to many of the smaller companies and even junior explorers.

As I stated at the beginning of this article share price action has been patchy but exciting in many cases.  Numerous “multi baggers” have performed as they doubled, tripled and quadrupled or better.  Gold stocks have been a great place to park investment funds during this long gold price consolidation.

Astute investors value gold stocks via several benchmarks including resources, assets, production and profitability, life of mine plus quality of management and ground position.

These factors point to sustained future growth in share price which equates to potential investor profits.  The balance sheet indicates financial health and potential yield – how much return am I going to get if I park my capital into this investment over time? 

It also provides an indication of risk versus reward.   As such we also find debt, hedge book obligations, convertible notes and royalties influence share price too.  We have prepared the investment basics of our Short List gold selections in the Gold Members area of GoldOz to illustrate this.

Make no mistake though – the single most important factor that drives any share price is money, capital flow – purchasing pressure.  I am talking about two buyers for every seller (or better), liquidity pouring into a stock in a sustained flow. 

This can only result from broad broker interest and media attention.  In other words share price is driven by positive promotion in its various forms.  To achieve this, a stock needs a good story initially and over time it needs a high level of profitability over a sustained period.

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 – until the end of August.  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.
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.

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