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Australian Gold Shares in Massive Break Out

Commodities / Gold & Silver Stocks Sep 03, 2009 - 06:47 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleWe have been working at the subject of international participation in the Australian Gold Sector – a “how to” for offshore investors.   A file will be down loaded into our Gold Members subscription area within the next few days setting out the offshore Exchange Codes and methods to invest in this exciting gold sector from anywhere in the world.  

Australian gold stocks have traditionally traded at lower valuation metrics compared to their North American counterparts.  This is on record and a matter of recorded fact.  This time however, in this Gold Bull Market, it will be different for two monumental reasons.  Please read and consider the following and see if you agree with my logic.

The internet and global trading systems have come along since the last gold rally.  In the 1970’s there was no platform for offshore traders to participate.  In the late 80’s the internet was new and PC ownership levels were very limited.  I would hardly call the late 80’s rally a Gold Bull either.  Today there are mechanisms that equalize relative values across the globe in a heart beat.

Think of the term arbitrage – the internet has the potential to equalize gold stock values in similar fashion to commodities traded between international markets.  The upside in Australia for our gold shares is greater than anywhere if this comes to pass.

The second reason is the strength of the Australian economy combined with our political stability.  This makes Australia an attractive lower risk destination for capital.  The global growth engines in Asia have to build infrastructure and this will also maintain the commodities boom and a strong Australia over the next 50 years.

A global demand wave inflicted on our small gold sector would push share prices into equilibrium with North America in quick order and to a point this has already begun.  As gold breaks US$1,000 and moves strongly upwards soon we will have the added force of a coordinated global gold stock rally.  The upside potential is fantastic.

Break Out

The XGD has broken out and up with power today.  The Australian Gold Index (XGD) has risen 351.8 points as I write this article - which is up 7.23%+ to 5,219.  The Aussie Dollar remained virtually static over night so the large US dollar gold jump translated into an equal jump in the Aussie gold price which now stands at $1,170.

I have been warning that time was running out to buy gold stocks before the break out and this now looks like this was a good call.  Of course we are now looking at resistance levels in the POG and it may take a shot or two at the magic US$1,000 level before we blast off.  The shares are telling us and have been telling us by their behavior that the break out is imminent.

One of our larger gold producers Sino Gold has announced a strong take over offer from Eldorado Gold of Canada.  The offer was above market once again highlighting exactly what I have been saying – these gold stocks are undervalued – and gold hasn’t even broken up yet.

Capital Flows, Smart Money & Survival

There is an old saying – “capital is a coward”.  This is an important thing to understand about money flows in the current economic environment.  Using this one fact to your advantage may lead you to increase your wealth significantly in these challenging markets over the coming years. 

Investors that look after their money are anything but cowards of course – they are taking the prudent and intelligent course of “economic survival” when they transfer funds between investment classes for asset protection and capital growth. 

Smart money is moving from the least stable countries towards the more stable areas of the globe for investment purposes.  This also includes destinations that have better long term fundamental prospects for their respective currencies such as the Euro and Australian Dollar for example.

This strategy, if successful will enable US citizens to repatriate capital back to the USA when the USD is much weaker at some point in future.  Any short term rally in the USD should be used to escape with greater leverage into other currency zones.  The currency fluctuations once your capital is offshore will mean nothing if gold stocks perform as we expect.  The trend will be your friend.  In the meantime offshore investors can make profits down under in our magnificent gold sector.

Leverage without a Time Limit

Parts of Europe have significant problems, along with the UK so this requires a slightly different approach.  Precious metals are an essential asset class to hold as a capital base and then there is the age old quest for leveraged growth.  There is one form of leverage that can be employed without a time limit for any contract.

Gold stocks will leverage the rise in the gold price but there is additional company risk.  Shares can be bought and offer leverage because their profit levels rise at a faster rate than the POG appreciates – and so to their share price.  If your timing is not spot on the share script will not expire like an option contract so there are advantages.

UK and European residents can participate in the Australian gold sector in different ways via Germany or direct into Australia to protect their investment funds on shore.

More on the Upside in Australian Gold Shares

Scarce gold reserves will be hoarded in future and the only avenue to invest in gold may well become gold shares in the global market place.  This demand will exceed supply in North America and head for politically and economically stable destinations with such force it will overwhelm supply drastically.  

The leverage provided by investment in currently undervalued Australian gold stocks will be a powerful wealth builder over time provided you get into the right stocks.  Our research has identified stocks selling for as little as 2.5 x gross profit and current market capitalizations well under net tangible asset values.  You are getting profitable ounces in the ground for free with these investments in some cases!

Australia will be a prime candidate for offshore investment flows into our gold sector for several reasons as explained above - aided by the internet and international trading platforms like the US Pink Sheet OTC Market and Xetra ("Exchange Electronic Trading") which is a worldwide electronic security trading system based in Frankfurt, Germany. 

A more simple method exists which allows offshore investors direct investment via Brokerage firms in Australia.  This enables you to participate where there is the greater liquidity which is highly important for getting in and out of your position.

Offshore investors may not realize it yet but you can invest in Australian gold stocks using a local bank account and a local broker or the systems above.  Many of our stocks are listed on the Frankfurt, Munich and Berlin exchanges as well as global stock exchanges and we are now completing a file to show you how and where in our Gold Members access area at GoldOz.

Capital is also headed out of higher risk assets, the ones perceived to have most down side risk and the least liquidity.  This is an ongoing process and a feature of the economic climate of the past several years.

Australia is faring pretty well in this economic crisis and has been a popular destination for safe haven and hedge oriented capital flows.  We have also received a great deal of attention from Chinese capital seeking resource and gold mine exposure and outright ownership.  June quarter GDP growth figures released yesterday showed a 0.6% growth rate which is highly credible compared to our first world (mature economy) counterparts.

Our banking system is amongst the highest rated on the planet however the money is not arriving and sitting in our banking system. 

Recent Record Highs – this section written yesterday…

Few mainstream investors realize that some of our gold stocks have been making new highs recently while their beloved industrials, property trusts and financials et al still languish little above half their October 2007 high point.  Talk about a recovery – if there has been one it was in our gold sector for selected stocks.

We have been working hard to get the word out about gold, silver and gold / precious metals equities for some time and have stepped up our efforts lately for good reason.  Time is running out to buy into the gold stocks that have not run yet.  Time is running out to buy gold under US$1,000 or silver at these levels too.

Gold is getting ready to break out from a boring light volatility pattern.  Quiet periods are most common in most markets.  Strong movements up or down require a period of quiet in order to absorb volatility and to create new levels of resistance or support.  The strongest moves tend to be preceded by longer periods of range trading.

Gold appears to be building a new high base. The current extreme low volatility levels are pointing to a period of high volatility to come. 

Ranging markets like the one we currently see in gold often reach the lowest level of volatility just before a new trend pattern emerges.  The opposite is also true in that strongly trending markets become the most volatile just before a reversal and hence we see the classic hyperbolic pattern.

As we enter the normally strong seasonal period for gold and gold stocks many traders still appeared to have nerves that the Q4 falls of last year were to be repeated.  Yet gold stock behavior is totally different this year so what is this telling us?  It is telling us many investors are wrong footed and that opportunity this close to the break out is still with us!

This year we have excellent action in the gold stocks and the XGD index of Australian gold shares has held firm.  In fact the XGD has continued to do its own thing most of the time going against the general market most days.  Yesterday the slight fall in the XGD was by far outweighed by a 1.66% fall in the XAO and near 2% fall in the top 300 metals and mining index (XMM).  Today the XAO was flat, the XMM was up 1% and the gold stocks outperformed yet again – this is a trend.  Our special discount offer for Gold Membership with additional free bonus time runs out this week so get in right away if you want to take advantage of it – details are on our home page.

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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