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Government Debt Disaster and Gold Opportunity

Commodities / Gold and Silver 2010 Jun 08, 2010 - 07:54 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleThere are many current global opportunities that might escape investors at this time.  With so many different influences at hand it pays to keep the radar screen on and one eye on the markets at all times at the moment.   Things are moving and developing quickly.  Disaster is opportunity in disguise if you can work out how to play the situation.

Take Greece as an example, one that scared a great many people and caused massive disruption and pain for many.  If you live in Europe and had your Euros converted to gold, or USD you just converted a massive opportunity into profit.  I warned Spain was going to ‘happen’ next a few weeks ago and that gold was going to go through the roof.  It is up US$50 since then on the back of further break down in the Euro and fears about Hungry.

The Australian dollar has fallen sharply and gold in has risen in USD causing a double whammy effect pushing the local gold price to $1530 as I wake up today.  This is the price that most ASX listed producers are selling at making them wildly profitable.  The XGD Australian gold index is sitting above its 200 day moving average and has held well on the back of strength of the larger producers.

Now look at the Australian Governments unfortunate RSPT as another disaster and FANTASTIC OPPORTUNITY to be exploited for profits.  The proposed super tax has created a major opportunity and effect on mining around the world.  This is a PR disaster for a government that apparently misunderstands or simply disrespects the long time frames required for investing in, defining and developing new mines.  Let me be very clear there are two key points a lot of the worlds media is missing here;

  • Many of our ASX listed miners have offshore operations and are not effected
  • The tax is not likely to be implemented, either in it’s current form or at all

Why won’t it be implemented either in this form or at all you ask?  Good question the answer simply put is that it does not work.  It does not achieve what it is intended to achieve and has created a war with the super powerful mining industry, and all investors, that this government cannot win.  I am not politically motivated I am instead looking at how we can all make money from this situation. 

The latest political polls here indicate the current government and the proposed super tax would have been soundly defeated this past week if the looming election had been held.  Mr Richardson, who is one of Australia’s highly regarded economic forecasters and chief of Access Economics, said “the tax would slow the development of new projects and while minerals might not be mobile, investment in them certainly was”. 

Even worse for the government he has rejected the basic modelling behind the RSPT confirming the observations and obvious conclusions of investors and the mining industry around the world.  According to Mr Richardson it would take 50 to 100 years to raise mining output in Australia and even then only “once Australia had returned to its initial relative position on the global cost curve”.
I am increasingly confident that this tax will never see the light of day and that any negative effect done on the existing projects within the mining sector here will be clawed back.

The opportunity

  • Established mines in Australia that are profitable will benefit greatly when this tax is scrapped, watered down, or in the event the government fails to get re-elected
  • The economic outlook has just taken a serious hit here in Australia and this creates lower activity, a temporary moderation of interest rates and a lower currency exchange rate.  This means the AUD price of gold has been soaring for the local producers who, in contrast are currently suffering from depressed share price
  • This presents an opportunity for distressed assets to be snapped up by astute offshore investors and funds, all at an advantageous exchange rate in the very near future
  • Offshore miners listed here on the ASX are not affected anyway and will attract more attention now so we have listed them separately in our data base – they will receive the investment lost to Australia as “wealth is transferred to Africa” according to RIO Director Rod Eddington
  • Mining in Canada, Brazil, Asia, Africa and everywhere else has just received a boost because the damage to new projects here is already done – but not the current ones

Investors that shun Australia now are going to miss out because this disaster has created superb opportunities here for a range of stocks as I have outlined above.  Global negativity and de-leveraging have intensified the opportunity. 

More disaster and opportunity

The debt disaster is unfolding in Europe and around the world at present and this fire will flare up in different economies at different stages for years to come.  Hungry for instance, assuring us they will fix their “situation” I wish for their sake it was even remotely possible.  Sentiment will ebb and flow on all countries in serious trouble with unmanageable levels of debt. 

They will string out the inevitable which is why a debt collapse is so slow and painful.  It happens on a sovereign level, for banks, at the corporate level, SME’s and for individuals.  They all try to hang on; nobody wants to take the bitter pill.  This is the major trend that will hit everybody with any debt via higher interest rates.  This represents a group of disasters to follow for the foreseeable future. This is also an investment opportunity that takes a number of forms;

  • Gold and silver investment
  • Gold and silver stock investment
  • Currency volatility and associated trading opportunities
  • Short selling and reverse ETF’s
  • Rising interest rates – cash, falling markets and extreme lows – cash again
  • Distressed asset purchasing 

This disaster can be measured by economic scientists as ‘out of control’ money supply growth and ‘debt to GDP’ amongst other metrics.  These are worthwhile benchmarks to follow.  This last ratio is at extreme historic levels at present in most of the mature economies in the developed world.  This tells you we are experiencing critically high debt exposure. 

At the banking level this manifests as difficulty to acquire funds for resale such as in Europe where the best offer for one bank recently was 8.5%.  This was not commercial for them so effectively they could not get funding.  This type of repercussion of higher risk factoring and sovereign debt drama causes major balance sheet problems in the banking system.  The same thing is happening in the US in a ‘zero debt’ environment at the Fed level.  You have cash cows being forced to pay 2% over the LIBOR rate and other corporations in worse shape paying up to 8% already.  Cost of capital is going through the roof as I have continued to say.

Without expanding in depth on the repercussions for the banks here the outcome is the desperation for deposits as we are seeing in Australia and eventually the offloading of non-performing loans – asset repossession and sale.  This last factor is the slowest part of the equation and this is the key to why GFC2 will evolve slower than GFC1 – much slower.

Quite simply this will allow a more orderly decline punctuated by fat tail events that come out of the blue and cause massive upheaval on a scale dependant on the location and nature of the event.  Understanding the nature and formation of this stage of the financial crisis is essential.  Thanks to associates who have exceptional international banking and debt market experience here at GoldOz we have been able to warn about Greece and then Spain before most of the market.

I realize that the falling market and the risk end of a transaction is scary however this is the real business end of the buy low sell high equation.  This is the end that sorts out the contrarians from less experienced investors. 

Will it (GFC) be different this time is the question.  The answer is yes, it is already different and therefore we need to establish how it will be different to formulate an investment plan.  If you need proof take a look at the 19% price of gold in Euros in the last 60 days.  Gold is up nearly 12.27% for Canadians, 13% for the UK, 14.6% in India, 11.7% in Brazil, 5.8% in Japan, 15.5% in Russia, 13% in Mexico and 18.5% in Australia.  Before you say this is just due to currency volatility then consider that gold is even up about 6.5% in USD terms.  (Figures 2 days old)

This is a time to be mostly in cash if you play the longer trends.  It is also a time to be in gold stocks if you have a shorter time horizon for investing and an appetite for risk.  This is where it is essential to understand this phase of the crisis in greater depth and from a different perspective than normal equity analysis. 

I have been investing in this gold bull from the very beginnings and writing publicly for a few years now so we are no strangers to this end of the opportunity.  Now we combine this with more advanced practical knowledge of debt and the currencies we have closed the loop.

Many of my colleagues and I have been telling you to invest in gold and silver for years and those that have done this have benefited tremendously.  From 2000 on the US citizens benefited more than any other from precious metals because they are a hedge against a falling currency.  As this crisis hits certain points the price of gold will rise dramatically against all currencies.  This phase may have already started and the gold stocks are going to launch next.

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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