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How to Get Rich Investing in Stocks by Riding the Electron Wave

Aussie Gold Stocks Surge

Commodities / Gold & Silver Stocks Mar 21, 2011 - 05:48 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleGlobal events currently support gold and Australian gold stocks.    Yet gold and the ASX-XGD index have been in a consolidation and correction mode of late.  The Australian gold sector has underperformed gold itself over the past two weeks, within a long-term uptrend, offering some sweet pickings which we did not waste.  Investors swooped on these exceptional investment opportunities late last week as the Australian gold sector surged up from oversold lows.  Here are the supports (from 5 year – 1 week tick chart) I provided in Newsletter 27 released 16th March:

“We are currently at important support from both the horizontal line A which is old resistance – possibly new support, and also rising trend support line B.  RSI is also at key support as we have not been lower since that dramatic swan dive during the GFC in 2008.”  Since I posted this for subscribers we have rallied 476 points in two days nearly touching 7,500 today (Monday 21st). 

I am also very pleased to report that the GoldOz educational portfolio now has 13 different companies on the register and managed a 6% gain in the first 2 months, using less than 25% of the capital.  This was not a bad result in a falling market.  As I have said before there are always opportunities in all markets.  This fund has now moved to over 40% of capital invested waiting for further confirmation of a renewed uptrend in these gold stocks driven by a renewed uptrend in physical gold.

I believe that fall was probably the final wash out before the uptrend resumes.  To support this theory I also offer some charts on sub-sectors of these gold stocks.  The first chart below is a five year chart of the larger gold producers on the ASX, without the distortion caused by Newcrest Mining on the ASX-XGD (which is weighted).  Therefore this chart below offers a broader representation of the stocks and their progress or lack of it.  Remember that the Australian gold price averaged well under A$900 per ounce back in 2006 to 2008.

This chart clearly illustrates that the Australian gold sector is still cheaper than the pre-GFC crash levels and yet gold is around 50% higher (now A$1400 compared to A$900).  I marked an ellipse around a series of dips that ran below the 200dma since the GFC.  This recent pullback was exaggerated by the situation in Japan and the “risk off” selling that followed.  I also added a support trend line that held firm on this pullback.

You can see a similar picture for the emerging gold producers and a similar uptrend line also held.  Again I suggest these stocks are significantly undervalued compared to gold and their previous levels back in the pre-GFC period.  All credit to these companies which have been making strong progress into a rising gold price.  The share prices do not yet reflect the progress made and this offers investment upside.  The rising 200dma on both charts illustrates the superb uptrend in both sub-sectors.

Apparently the big money agreed with me on the 16th as we have rallied around 7% in the last two days trading, as of the close today.  Now to the events that I believe will drive gold again in the short-term.  The Sunnis and Shiites in the Middle East will have mixed feelings over the military intervention in Libya.  The other trouble in the region is also well documented so no need to go over it again.  The Middle East has just become even more volatile and I sincerely hope it does not blow up.  In any case this has lit a fuse under gold and may cause a new breakout to the upside for gold in all currencies very shortly.

I am getting conflicting views on the global debt markets and there is a lot of spin about, even more than normal.  The rebuilding in Japan will stimulate a massive amount of spending which is great for the economy in the medium to longer term.  In the meantime they need to clean up and go through process before spending this money.  In the short term the effect is negative make no mistake and this is why the Central Banks are intervening to cap the Yen.

The initial rise in the Yen was caused by a partial close in the Yen carry trade as some funds exited non-Japanese assets in order to cover loans previously taken out in Yen.  This is why the AUD came off dramatically to name just one effect.  We love to see the AUD come off here in Australia as it pushes the AUD gold price up increasing profits for the local producers.  This initial unwind will be repeated in waves creating the need for continued intervention.  The question is always – how effective is Fx intervention in these cases?  Only time will tell but we suspect the CB’s will have an uphill battle for the next few months at least.  Speculation would have also added to the Round 1 Yen strength.

Japan Inc includes the Sovereign Fund which holds the foreign reserves.  These reserves are sitting in other currencies and bonds not cash in Yen.  These holdings are not fully hedged as is being claimed in the markets and media today - this is absolute spin.  The days of “spin your way out of trouble and it will all solved” are over because the troubles are just too deep.  The Greenspan days were classic for this but now jawboning is gradually becoming less and less effective.  The Japanese would not buy risky high yield assets and then fully hedge then what would be the point?

The best result possible for global debt markets would be that the Japanese just stopped buying new bond issues, but continued to roll over their foreign bond holdings on maturity.  This is highly unlikely but it would still place a serious new pressure on global debt markets.  Remember recently when debt markets celebrated that Japan was supporting PIIGS bond issues?  This would all stop under this scenario.  Now consider that the rebuild has just been revised up to US$500B and you soon see there will have to be some sales of foreign denominated reserve assets.  This all puts pressure on the Yen – upwards.

There will be increased currency volatility over this coming period and this is great for gold.  The Central banks are trying to cap the Yen suggesting that the Yen will be going up in waves and the AUD will be under pressure. This is great for Australian gold stocks. The world is not looking too keen on USD here and this also puts pressure on the Euro – going up.  This adds great pressure to the PIIGS as they need a depreciating asset, a weak Euro.  So do Germany and France as this assists them with exports and drives their economies. 

Japanese retail investors were heavy buyers of Kangaroo bonds and many of these investors will want to bring home their money over coming weeks and months. This is also bad for the AUD and puts pressure on the Australian banks.  Add the Japanese fund, insurance and company repatriation activity due to need and the risk of the carry trade unwinding and you have a significant capital flow.  We also suspect added pressure will be on the bond sales in the US and Europe in the short to medium-term.  Chances are the Japanese will want to sell some risky Euro debt to avoid potential losses – this is not a pretty picture.

The selloff on gold last week reversed quickly as expected here at GoldOz.  This is another reason why we waded in and increased holdings of Australian gold stocks in our educational portfolio. Gold bounced off the 20 week moving average confirming current strength.  I have been excited by the gold stock behaviour for some time because the juniors are performing alongside the larger stocks.  This is gearing up for a tremendous rally based on my observation of gold stock behaviour during the last ten years.  We are offering further education and market coverage in a client only Newsletter which is part of our Gold Members service.  This service is currently on special, selling at a discount if you want to take advantage of this opportunity or just have interest to increase your knowledge on the Australian gold sector- we would be happy to have you aboard.

Good trading / investing.

Neil Charnock

GoldOz has now introduced a major point of difference to many services.  We offer a Newsletter, data base and gold stock comparison tools plus special interest files on gold companies and investment topics.  We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators.  GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.

Neil Charnock is not a registered investment advisor. He is an experienced 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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