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Global Debt Crisis Signals Gold Stocks Gold Rush Two

Commodities / Gold & Silver Stocks Mar 01, 2010 - 08:20 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleWe called it right again at GoldOz at the beginning of February when we called the XGD “Oversold” and it has since reversed and rallied.  Gold made its low a few days later too.  At the time many analysts were calling for a general market collapse and they have been wrong so far.   We had stepped aside warning Gold Members with support levels and charts as this the local gold stock index weakened.  This happened unexpectedly at first however we reacted quickly.

The lower supports we later pointed to for the XGD have held nicely so far and the recent. The test of lower supports for gold is also fairly typical after an initial breakout in this gold bull market to date.  Yet many local gold bugs have stayed away waiting for the “big fall” – fear was in the air and yet all signs to date point to this being a fairly minor correction at this point in time.

I will say it again; I do not think that this correction will turn out to be the early stages of a 2008 style stock collapse.  Many investors listened to the bears and offloaded at the wrong time and they joined the incorrect side of the trade in my opinion.  They did this because they do not understand how long it takes for money to work through the system.  The stimulus money is still out there and until the Fed in the US raises rates we will see muted growth.

In the meantime I have forged ahead and produced an upgraded Ratings Table product that really nails the producer valuation metrics into a user friendly format.  A mathematical charting trick has enabled me to produce this work and the feedback so far has been fantastic.

Understanding the gold stock valuations is the most important aspect of investing in this sector aside from timing the up-legs of the metal.  By creating an important chart snapshot of each company and then presenting them side by side on the same scale a comparison becomes obvious.  I have included over 30 of the gold focussed producers on the ASX in this product.  I am really excited about this part of the Gold Members area.

The chart above shows that these stocks are not expensive at present.  AUD gold is still up near $1,240 as I complete this article.  The ASX gold stocks have had a decent correction that is not likely to go much deeper.

In fact if this current rally continues higher and breaks above resistance we will have a very powerful buy signal as shown below.  This is not guaranteed; we need confirmation from a break out above resistance levels as shown.

My last article warned about the real cause that will send these markets into retreat in the end – domestic and sovereign interest rates.  This may take quite some time to fully develop however it most certainly will.

We also called the beginning of the sovereign interest rate rises within the debt cycle recently and have stated for some time that the Fed would have to raise rates to ATTRACT INVESTMENT.  The Fed cannot print indefinitely to finance this debt because they do understand the hyperinflationary ramifications if they do. 

The very real risk is that they have already built enough future inflation into the system.  It is a difficult situation in the USA and some leading analysts are calling for investors to flee the Euro zone, the UK and the USA.  I believe this is a good idea but do it with an eye for timing.

I have included a link at the end of this article to an impressive report by a colleague that may assist global investors with recent tax changes and global investing.  It is essentially a report to assist you to protect your capital.  Recent events in the UK make this a highly topical report.

This current activity and world news all sits within our view of sovereign debt problems and currency fluctuations for this year.  The currencies will gyrate around credit rating down grades and other news.  Normally interest rate rises are bad for gold however not this time as I shall briefly explain.  

Normally interest rate rises are bad for gold because cash can become more attractive than gold if the real interest rate (difference between actual interest rates and true inflation) turns positive.  A real investment return on cash will drive investment into this asset class.

In other words the theory is that if interest rates are above the inflation rate you are better off earning a return on cash for a greater proportion of your portfolio than holding a higher proportion of gold which generates no interest as such.  The greater the spread the better the return the more you weight cash upwards within your investment portfolio.

This causes investors to lighten up their bullion holdings and re-weight more toward cash.  This is during “normal” investment conditions however and this rule of thumb does not apply at this time.

Rising interest rates usually means that business is perceived to be able to absorb increased borrowing cost and or is in fierce competition for borrowings due to strong growth.  The theory is that Central Banks raise rates in this circumstance to cool growth and make the increasing level of economic activity more sustainable. 

At this mature stage of the global debt bubble however rates are rising at the sovereign level first (except in a very few cases) in response to a negative reason.  This is vastly different to rate rises due to strong growth.

This is all about attracting capital – competition for money of a different kind.  This is about a desperate attempt to patch over a low or non existent level of growth.  This is about raising money to cover Government borrowings to be spent on more stimuli, or to pay off the former stimulus packages.  In some cases this will become a desperate attempt to cover the interest payments on borrowings which is an alarming scenario.  Offshore borrowing is to get more expensive and I warn again that what we have seen with Greece is just the start.

Governments will try to sustain low domestic rates for a time however this cancer will eventually spread through the global economy to corporate and domestic rates crushing any chance of growth in future until the various bubbles (including the debt bubble) have been unwound. 

I am not saying that this will happen immediately – it will come in stages over the next year or two as patch after patch is applied to the system firstly to cover over the emerging sovereign issues.  All currencies face the same problem because they are fiat, so where do you go?  The forex savvy big players will swap from one currency to another and continue to hold gold as a hedge.

They will head out of the USA, the UK and Europe.  Money will also flow towards gold stocks and Asian growth plays.  It will head for the legitimate tax havens and this is the part of the context of the report on offer via the link at the end of this article for anybody who is interested.

The Australian dollar looks set to drop briefly under the foreign exchange conditions looming (UK and Euro) because it is seen as an exotic currency despite our fantastic sovereign risk rating.  For the local gold miners this is all fantastic news looking forward.  A surging gold price and a falling Australian Dollar will create a very high AUD gold price.  Debt free gold miners could reap bonanza profits. 

All credit is due to many of the gold miners here who have taken the chance to retire debt and get their balance sheets in order while they could still raise money.  This is an ironic concept seeing as they are the only producers of real money we have in this modern era.  Having to raise paper fiat currency so they are financially healthy enough to produce real money is… well you get the idea.  Gold is important and getting more important all the time for the financial system.

Some Free Subject Matter on Gold – excerpt form the Gold History area of GoldOz

“From the first nugget found in a Bathurst Creek to the 370,000 immigrants who arrived in Australian during 1852, every step of the gold rush changed this nation. Before the 1850's, Australia was a lawless unknown, a prison colony meant as a punishment and threat to any who would commit a crime in the kingdom of England.

However, just fifty years after the beginning of the Australian gold rush, Australia became an independent country. It transformed from a wilderness inhabited by convicts (and the indigenous peoples) into a free and federated nation in less than half a century. Such a huge shift has rarely been seen anywhere in the world.

So, what has the power to do that to a country?

This is an excerpt from the new GoldOz (free area) Gold History section – written by Rowan Charnock

Gold is still that powerful.  The global crisis is not going away and neither is this Bull Market for gold and the gold stocks.  A gold mania lies ahead but not for several years which is great news for all of us.  We want a steady tradeable series of up-legs to profit from.

Australia is part of Asia by default and we are well placed to benefit from this fact and from supplying growing economies.  Euro zone investors and those from the UK and the USA will gradually gravitate to this market here – after all some of the biggest name investors and funds are taking larger and more diverse positions in the ASX gold stocks. 

I have just completed a file to show some mega profits generated in the last few months including a trade that has only just begun – yet has created a significant profit even during this weak market.  It is at the head of the latest news (March 1st) on the GoldOz update page and you can down load it for free if you are interested. 

I also promised a link to a special report on tax changes and legal solutions available here – special file link

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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