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Gold and Silver Analysis - K30 It All Adds Up – Don't Be Confused

Commodities / Gold & Silver Jul 09, 2007 - 02:29 PM GMT

By: Neil_Charnock

Commodities

What has been so interesting about the gold and silver markets over the past few months? Very simply there has been massive selling of physical bullion and a massive supply of negative news.

However despite this; we have seen very strong resource share price performance on the ASX and very strong appreciation of the resource currencies – and we have seen relative price stability in the precious metals too. Gold demand has almost met the increased supply as consumers have grown used to relatively higher gold price levels in India and the Middle East . There has been some other significant demand also.


Industry insiders have indicated that they see higher bullion price levels down the road – look at the very recent news on Newmont Mining. They indicate this view by their actions. They have joined a growing list of precious metal miners that do not wish to remain exposed to the risk of hedge book losses any longer. With costs (read that as inflation) continuing to rise - the miners have to watch their bottom line carefully and this has become prudent financial management. Oil, wages and consumables put enough pressure on balance sheets and profitability – rising gold prices are expected by the industry and hence the heavy investment in hedge book elimination.

The Bear propaganda machine has been running overtime however, as the Gold Oz Newsletter contributor Colin Emery puts it; earnings continue to confound them – because it is a silent proof of the underlying demand caused by the strong global economy. So why all the negative press over these past few months?

Is it just the old “follow the crowd” mentality and a lack of independent analysis - or is it self serving propaganda?? I can't say and don't see the point in that kind of speculation – but it is an interesting thought to amuse oneself at times. My only point is that the negative press is a market force and so is sentiment. It is a downward force that has also been overcome by the markets.

Colin made another point which relates directly to a major market force I have written much about – money flows… “Then there is the other major factor - the plethora of investment funds seeking homes in which to park their funds – homes that can generate investment returns”. The money creation in the mature economies creates a climate where these funds grow and this will continue.

We are talking globally when we talk about demand and growth – a number of mid tier economies ( India and Russia for instance) have reached the critical mass necessary to generate strong growth and commodity demand. Europe and the UK , also the resource economies; they are all strong and booming. Here is a classic example that cuts through the negative hype – the performance of BHP and RIO Down Under…

Our two major Resource Companies have appreciated by approximately 50% this calendar year and the AUD$ is up over 10% against the Greenback as well – so I am very happy with the direction of the market and of my own analytical accuracy this year to date. Strangely we have also seen strong price increases in quite a few small cap producers, developers and even explorers too. I am even more pleased to report there are a number of striking opportunities present even now – even if metals do not rally from here – just based on undervaluation and the recent tax loss selling now ceased.

The obvious conclusions I draw from all this is that:

1. The big end of town (Funds and sophisticated investors) are moving in / have moved in - hence the rise in the major resource stocks, and many others.

2. The industry is gearing up for a continuation of the price trend of the price of gold over the past few years.

3. The press has been wrong in their assessment of the direction of the commodity markets and so have most of the main stream commentators.

4. The gold bugs and public that have not yet spotted the gold rally have so far missed the best buys – and or been shaken out of their valuable precious metal stock positions at the wrong time.

Given that the above is true – the as yet undervalued ASX Resource stocks should also rise – this seems like a “no brainer” – especially with the current poor sentiment as an added bonus indicator. Colin sees some short term consolidation or a shallow correction in the S&P 300 Metals and Mining index although more likely at the expense of the large stocks that have had a big run lately – these stocks are heavily weighted in the index due to their size. Therefore we had better look to other stocks within the ASX Resource sector for money making opportunities which may lie just ahead. Even during the quiet season in the US , and here is a pertinent point about this factor…

One astute and very experience professional industry insider contacted me after my last article – he was complimentary which is always nice particularly when coming from a man of 50 years experience in the industry. The missing point he wanted me to make is a good one; our “school break” is different to the USA . Your summer break creates a generally dull market - however the market can and is producing some excellent volatility Down Under as we begin our new Financial Year.

A closer look at the ASX Resource Sector:

Colin has called this right over the past month or more and here is the chart and an except from his commentary in the Newsletter…

“…and it's been dead right… and I'm still sticking to it – it's a very clean break and although pullbacks will occur these should be bought.” In the following issue – “Not much more I can say – the Miners and Minerals Index has broken up and out from the box and now the edges of the box 1 and 2 is a main support area and will be hard to break. A reversal pattern is circled and that's also a support area – and note the high support of that is line 3. Buy on supports and if we ever see it back in the box look to buy. (Exit points were also given on a break down of this situation as a stop loss measure).

And what about Silver?

 

Here is some of the conclusions from Colin from the July 2 edition of the Newsletter… “So my initial view to buy on supports I still maintain. Now as a trader if you've been for example averaging down – I would consider another average. For those that would have exited on the break of either line 1 or 3 I would now after due consideration – breathe and relax, something you would do following an exit – and this reexamination – would be looking to re-enter – or get that position back on. Those that haven't had a silver position – now would be a good time to start looking – turn the radar on. Silver looks to have broken down and overshot – look to buy here on supports – we are at base value for silver and base value is line 5 at $US11.65 / 11.70 – and it's not that far away now.”

So - Colin sees value just below here and we are in the weak season for silver and there is a big short position in the commercial sector and this must be unwound. I just read through the Silver Book from the VM Group in the UK which is an interesting read and attempts to explain away the long bear market in silver with some convincing analysis. This is professional, logical and very thorough work, with several of their own conclusions and take on the unknown factors in the silver market - and I can only make one comment (note not a direct criticism) which is at the heart of one of my key arguments for the precious metals; they make no compensation for inflation and the decay of the units that the price of silver is measured in.

That is to say that they see “the price of silver remaining high” in the $11 to $15 price bracket due to investment demand despite a supply surplus. Should one actually plot the true value of these 2007 and 2008 dollars we will see that silver has fallen considerably during the latest price consolidation – over and above the actual USD price correction – because the US is inflating the Greenback. They present a chart showing a previous peak back in 1982 at $US15 1883 dollars and I maintain that this lack of account of inflation clouds the whole PM valuation picture when it is not included.

Currencies are sinking in cooperation; or is it sinking in competitive devaluation and should be sinking faster against the precious metals than they have according to my analysis. To illustrate this point – mine costs have risen sharply, inflation – exactly what I have been talking about. Get it? The price has to rise just to maintain production. Overall it is an interesting report and I am happy to go back and study it more carefully as more data for analysis is always worth a visit. No doubt we will see some discussion about this report in these web sites over the coming days and weeks.

Globalization and low wages in China and Asia have distorted the price of certain goods and even some services however you only have to look at the key component costs of the average household in the West to see that oil and food are up significantly. Inflation and the real cost of living is up significantly. Trouble gradually brews as the inflation becomes harder to conceal and interest rates rise to the advantage of the banking system forcing middle classes further down the socioeconomic scale in many Countries.

Eventually gold and silver will catch up in currency terms – driven by a need to protect yourself from inflation – investment demand. On a bigger scale other macro trouble brews and the lid is clamped down by monetary policy time and time again. This is generally achieved at the printing press level. The game gets ever more interesting and in the meantime I shall hold bullion as insurance and trade the resource equities – use the price swings to my advantage.

It is always to analyze your own performance and in this wise - I just completed a precise accuracy test of our Newsletter on the April 2 nd issue and this has been posted at the GoldOz web site. The April 2 edition scored a highly credible 5/6 on the stocks covered (one nickel stock kept rising past our projection) including many near exact and exact support and resistance levels which held – and Colin also called accurate short term predictions for gold, silver, zinc and nickel. Copper ran with his longer term prediction however it overshot his short term high as can easily happen when trying to pick tops or bottoms in volatile markets.

Should you wish to participate in the Australian Resource boom and make money here you should consider a visit to www.goldoz.com.au and to purchase a subscription to our Newsletter.

Good trading / investing.
Regards,

By Neil Charnock
www.goldoz.com.au

Copyright 2007 Neil Charnock. All Rights Reserved.
Neil has traded bullion, shares, options and futures for over 25 years as a private investor.  He has also worked with small business and real estate.  Also the Author of articles on global economics and resource investment, has been published on over 30 web sites and recently provided input for a book on Junior Miners in Australia.  Neil has been self employed in numerous businesses including consulting and organic waste management - corporate contract, has also been a founding Director on a number of occasions.  Now the founder of GoldOz, a full time occupation, and is assembling a distinguished team with impeccable professional credentials in order to provide data services and general independent investment advice products.

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 my current opinion only, further more conditions may cause my 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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