The fall into that “Elusive Abyss” has been averted once again thanks to action by the ECB and the Fed.   The Fed has just offered a new QE (QE = quantitative easing) program, technically speaking that is.  The Fed has announced that it will keep rates at incredibly accommodative levels for at least two more years allowing the banks to play the yield curve.  Banks borrow from the Fed and then, instead of lending it into the corporate sector and CME’s, they buy Treasuries to lock in guaranteed profits.

I wrote over a year ago that this was happening and needed to happen for at least two years for the banks to rebuild their balance sheets.  Like it or not if the banks go down (fail) we will all suffer.  More on how this all works in the general economy can be read in the latest article from Peter Schiff, “The Fix Is In” (brilliant must read).  This is incredibly accommodative monetary policy by the Fed; it guarantees the world will continue along the current course maintaining current trends for some time yet and fits with my investment modelling assumptions at this time.

For experienced watchers of the precious metals Bull market you may have noticed that the dynamics of gold, silver and gold stocks have just changed again.  This change is what has just attracted a new group of investors to this investment class.  For new comers to this asset class welcome; you have not arrived too late this is a long way from over.  This new change in sentiment is an evolution caused by a number of significant factors which are combining to increase demand for gold.

Gold just reached a new record high across a range of currencies and it managed this feat with powerful momentum as shown by the RSI reading of 85.429 on the day, at the top.  Gold reached a record US$1,814 per ounce last week (intra-day high) and it also reached record highs in the € Euro, £ UK Pound, ¥ Yen, CDN Canadian dollar and the AUD Australian dollar.  The only major currency not found below its own previous record low against gold was the CHF Swiss Franc.

Gold stock share prices have lagged the price performance of gold several times throughout the gold rally since 2001.  This is cyclic in nature, the rising incomes of the producers soon spurs renewed investor interest at the new higher price level.  The price levels have progressively stepped up ever since I began watching gold more closely in 2001.  A new higher price range is reached and then the price consolidates before launching a new rise to each new price level.  This has created the step up chart pattern clearly visible on daily or weekly spot gold charts going back many years.

As the currencies fluctuate around against each other they gradually decline in value against gold.  These fluctuations also affect the earnings of the companies domiciled in each of these currencies.  A rising currency will mute the profit potential and therefore the share price of any gold stock producing gold in that currency; therefore investors like to see a falling currency against other currencies.  This is the exchange rate factor.  I know this is very basic but important for many investors to recap at this time.  Offshore investors can lose on the exchange rate or enhance profits by moving capital into markets on a major dip in the currency, especially if there are gold stock bargains to be snapped up.

Here is an AUD: USD 12 month daily chart – upside down to US viewers.  US viewers might view this ratio in reverse however the same technicals apply in reverse also.  I marked the main support / resistance line in red and the break point where it crossed back in March this year.  We just tested this line and it held on the first test after a short penetration to the downside.  However it also coincided with a negative divergence at point B and that deep RSI low.  Only time will tell however fundamental indicators are flashing a warning that we face some more downside in the Australian economy.  This is great for locally listed ASX gold stocks.  

Back on the 9th August one week back) I wrote an article “The Elusive Abyss” and at the end I stated:  “Now the AUD: USD ratio is back in the support range it is certainly a better time for US dollar holders to invest in our gold stocks.”  Gold stocks reversed back up and so did the AUD creating a double whammy bonus (short term so far) however I see a significant potential for much more to come.  It is likely that we will continue to see rising ASX gold stock prices (XGD index) now as a trend after a long 11 month consolidation.  More on this if you read further down.

Today I had a conversation with a renowned veteran Fx trader who had predicted (many months back) a negative outlook for the Australian economy by this time.  We both share the view that the AUD has just had a bit of a bounce here and has more downside.  The USD holders that agreed with what I said a week back did very well because they were able to snap up some really nice bargains in this gold sector Down Under.  The AUD: USD ratio will present another opportunity shortly for US investors to get some capital down here to participate.  We see the USD falling against another major currency however the AUD may fall further for a time.

Here is a short excerpt from GoldOz Newsletter 42 you might find interesting because it relates to the exchange rate and the Aussie gold sector in general:  “Now here is the interesting thing – the RSI sunk to that low I circled, down to 26.65.  This is the exact opposite of the RSI spike in gold as it indicated extreme weakness – internal weakness compared to previous selling on the AUD.  This was not profit taking it was long covering and it was heavy.  The signal means we can see further AUD falls perhaps on perception of lower rates, more risk off on turmoil or an actual rate cut here by the RBA.  This has changed the perception of gold stocks here and this will cause a re-rating over coming months.

The re-rating will be significant because the stocks have lagged the gold price rise in local terms pretty much since $730 per ounce!  Rising costs have impacted the effect of the rising price however nowhere to the degree we have seen in the share price lag.  The value distortion has therefore been significant and a great deal of this may have been due to the rising AUD which muted our miners’ earnings.  I have long predicted that the historic undervaluation of the Australian gold sector compared to North American stocks would change when conditions were right – driven by the enormously increased information flow and accessibility created by the internet – since the last gold boom in the late 70’s.  The leverage effect could be staggering if I am right.”
Gold is rising against all currencies over time even the Swiss Franc.  Now we have reached a level on gold far enough above the rising cost of production to ensure an upward re-rating for gold stocks.  Thanks to Nick at Sharelynx I am able to display the following chart at GoldOz and in this article:

As I said above the price of gold was $730 per ounce back in May 2006 and here is the chart of the gold producers on the ASX.  The red circle on the right is where we are now with gold at AUD$1664.  This chart shows a sideways consolidation over the past two years.  This chart is not weighted; I have that essential picture for you below before I sign off.

Here is the 24 month XGD vs XAO chart showing that the gold stocks are now running their own race.
Gold stocks began to disconnect long ago and few have recognised this I still see comments of concern on general stocks.  The correlation between ASX gold stocks and the general market is diminished significantly.  The light blue arrow follows the general market leaders and the rising darker blue arrow shows the XGD launching slowly upwards driven by a few leading stocks.  Most of these are represented in the GoldOz Educational Portfolio (subscribers only) FundB which is the less aggressive fund.  It was up in the bottom of the recent corrections with cash to add, despite the February 2011 starting date.  We provide the how to for subscribers to teach them about gold stock investment without recommending stocks, because we have no equities desk; we are independent.

Some education to share here however shows the rising OBV – on balance volume as the smart money loads up ahead of a major rally.  Down the bottom of the chart I have circled the current picture of the MACD histograms which have narrowed from negative to the neutral position.  Much more for subscribers…

We still have our special discount offer on Gold Membership if anybody has interest.  Please forgive me if I do not respond to all emails, the rising client base and work load now makes this prohibitive.  How you handle your finances at this time is critical, wealth is set to change hands like never before and we hope you are on the receiving end of this flow.
Good trading / investing.
Neil Charnock
www.goldoz.com.au
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.

At the same time the exploration expenditure that has been stimulated by higher gold prices is starting to result in some interesting new discoveries that can impact the growth of emerging producers significantly.  These emerging producers also offer exploration upside from Greenfield and Brownfield targets due to increasing cash flows and increasing exploration budgets.

Before we can analyse forward projections for gold and gold stocks we have to understand the past and the present in some detail.

The lack of world class discoveries points to an increasing supply deficit in addition to resource replacement issues for the majors over coming years.  New gold deposits of any decent scale (+10M oz) have become harder to identify in recent years.  These large scale discoveries have been in steep decline since the late 80’s.  Even smaller 1-10M oz deposits are also being discovered less and less since that time.  At the same time the massive debt overhang (still growing – read money printing) in the “first world” and strongly increasing investment demand over recent years is expected to provide additional demand for gold.

Now add decreasing production as a factor.  This is partly due to the cut-off grade response as larger companies feed lower grade ore into production in order to lengthen mine life. Average mined ore grades have decreased by 30% since 1999.  Just to balance this analysis – you would also have expected mines still operating at US$250 per ounce gold to have been increasing their grade back in 1999 just to stay afloat.  This 30% grade reduction equates to a rise in cash costs of around $150 per ounce.

Cash costs are a very important indicator however this metric should not be our fixation here because this does not reflect the total cost.  Total cost of gold production was up at US$690 across the industry in 2008 and at $717 in 2009.  These figures reflect a more accurate view of the real cost of developing and maintaining production.  As large new discoveries become scarcer this cost will rise further.

Of course this is an average and the larger mines that are developed at large scale deposits tend to produce at lower cost.  The lowered incidence of finding these large scale deposits means that larger mines are slowly losing their over dominance of total production. Now we face the necessity to mine smaller and smaller deposits to meet rising global demand.  Should mine profit margins fall into negative territory we would once again lose incentive to explore and develop these smaller mines.  This would exacerbate the supply imbalance further.  It seems likely that if massive deposits remain difficult to find the majors will be forces to scale down and be willing to bring smaller deposits into production.  As we are forced to go deeper (e.g. South Africa) or to lower and lower grades, to smaller and smaller deposits then the price of gold has to continue to rise.  A look back over historic gold production is both interesting and necessary at this point if we are to consider the big (production) picture a little better.

Production has changed greatly since 1970, back then South Africa produced 2/3 (about 30M oz) of the world’s measured gold production of 47M ounces per annum (PA).  By 1985 this had increased to around 50M oz PA and production in South Africa had dropped off to around 21.5M oz.  Global production was rising particularly in Canada, the USA, Brazil, China and Australia.  By 1990 heap leaching technology had been introduced liberating gold from lower grade ore bodies and assisting global production to around 75M oz PA.  The US and Australia raced ahead to about 12.8M oz and 10.6M oz respectively as the Soviet Union broke up.  Bulk mining methods allowed huge low grade oxidised deposits in dry climates to be exploited and new areas were opening up to explorers in Russia, Latin America and Africa.  This trend continued into 2000 before the effect on new global production started to reduce.

By 1995 South Africa produced just 16.75M oz, the US approached the level of the former USSR at over 10M oz and Australian production was rising sharply at 8.2M oz hitting over 10M oz PA by 1997.  Countries like Ghana, Indonesia, Chile and Peru saw production levels of around 2M oz PA increasing their share of the total world production, which was around the 1990 level.

By the turn of the century gold production was truly global as miners had searched the world for several years looking for higher grade mines and lower production costs.  The lag effect from discovery to production had reached a crescendo. The top three national producers were still South Africa, the USA and Australia however these three now produced just 41.8% of global production.  This is also when gold production peaked at over 2,570 metric tonnes PA, which is over 82M oz PA.  Then things began to change dramatically once again.  The demand for and price of gold started to rise and production started to fall.  Exploration had dropped off dramatically due to the shocking economics of gold production.

By 2005 global production was back to 2518 metric tonnes and Australia was the second largest national producer.  International investors may note that the weakness in the AUD worked for gold miners back around 2000 as the AUD gold price was still up over $500 per ounce.  This may account for an extra strong showing by producers in Australia at the time. The US was back to number three and China was launching their gold production up over 220 metric tonnes PA.  South Africa was back under 12% of global production after being up at over 16% five years earlier.  Demand was soaring with new demand from China as they opened up their retail infrastructure.  There were other changes afoot,that were soon to escalate the price of gold to new levels, capable of stimulating production.

The Australian dollar price of gold only took off near the end of the first half of 2005. So did our gold sector with a vengeance as all gold stock investors that were around at the time remember vividly.  By 2008 gold production was still falling as South Africa continued to produce less and less.  China was number 1, the USA number 2, Australia number 3 and South Africa number 4. Production is now much more evenly spread with Peru, Russia, Canada, Indonesia, Uzbekistan and Ghana all contributing strongly to global production – which was reduced to just 2350 metric tonnes.

In 2009 global gold production finally rose slightly back up to 2570 metric tonnes on the back of rising Chinese production and even wider participation on a global basis.  That also meant production was falling in other leading nations due to the reasons above; mining of lower grades and failure to bring on new large discoveries.  Demand from risk adverse investors was still soaring and Central Banks became net buyers.  Central Bank sales almost halved in 2008 and fell to 30 metric tonnes PA in 2009 after running at 400 – 500 metric tonnes a year between 1989 and 2007.

This was a significant shift in the fundamental picture for gold and it was expected by those investors that had done their homework.  We know the Central Banks selling was not sustainable and that gold was a valuable component for the Central Banking system as a hedge against currency volatility.  The global financial system was in dire need of stability mechanisms due to systemic imbalances across the board.

This reduction in supply from the Central Banks was equivalent to a 16% fall in global production by itself.  Total global production circa 2500 metric tonnes and Central bank sales of 500 metric tonnes comes to a total of 3000 metric tonnes. 500 tonnes from 3000 tonnes is about 16% which is massive.  Mining companies have reduced forward sales, called hedges, as well.

Hedging created forward paper sales of massive amounts of unmined production in the mid to late 90’s.  Some analysts claim that this, combined with Central Banks sales created a false low in the price of gold.  I am one of these analysts as I am always looking for price distortions that can be exploited.  In my view gold would never have gone below US$400 an ounce without Central Bank selling and forced hedging by financial institutions.

In this case the miners were also exploited however and many were lucky to survive at all.  Having lived and run mining businesses through such rough times these gold miners are very well justified to be angry about any talk of any super profits tax.  They, like farmers for instance are entitled to enjoy some good years when they finally arrive, reap the benefits and put something away for the lean years in future.

The thing to remember is that, if some of us are right, that gold would not have fallen below US$400 per ounce without Central bank selling and the sale of paper gold hedges (unmined gold) then this Gold Bull is younger than you might think.  Bubble propaganda states that we are up over 5x from US$250 however this is barely over 3x from US$400 to US$1400.  In Australia we bottomed at around AUD$550 around the year 2000 are at $1400 now for a rise of under 3x.  So what?  This gold run is just getting started and the mania stage is still far enough away for us to accumulate a larger and larger portfolio with the right strategy.

When you factor in the rising demand for gold, which surpassed 3,800 metric tonnes in 2010, you get a compelling argument for a substantial upside for gold price – and China is just getting started.  They are importing ever larger volumes of gold and silver creating a sustainable demand curve.  When China’s disposable income class recognises rising inflation and economic risk to a greater degree this can rise rapidly and significantly.

The official sector, governments and Central Banks will continue to hold gold as a valuable part of their reserves.  They are probably more risk adverse than the average investor because they understand the challenges in the financial system better.  So where does this all leave us?  Rising demand from several sources, rising need and awareness, stuck production levels and higher production costs has to equal a steadily rising gold (and silver) price.

Our analysis indicates that, correctly managed, we still have greater upside from investing in the mining companies.  We do recommend some physical metal as part of your strategy however not to hold the metal at home.  There have already been some home invasions and theft of precious metals so even a safe is not safe.  Store the metal in safety and spread it around different institutions no matter what the cost, it is worth it for the sake of your own personal safety.

Predictive analysis

The gold stocks are extremely fluid in that take overs, mergers, mishaps, new projects and discoveries make the sector more difficult to follow.  The rewards for doing so however far outweigh the time consumed by the process.  If you are busy this ongoing work can be purchased for as little as $1 per day.  Due to the nature of the industry and how the index components change on a regular basis I am rapidly giving up on any index analysis of this type.

We are just not measuring apples against apples in the indexes any more due to de-listings from the ASX (such as Centamin), major mergers (such as Newcrest and Lihir) and new entrants to the indices.  This market has become one where you have to play stocks on an individual basis and I view this as a good thing.  It makes it much harder for novice investors however the good news is that despite the strong run in gold in AUD terms since 2005 there is still some low hanging fruit.  We can still identify stocks that represent major upside for investors, stocks I expect to go up five to tenfold over the coming three years purely due to organic growth.

We are monitoring a number of the more promising stocks (at current prices) in an Ideal Portfolio to show the gains in real time.  We also include investment rationale and timing theory as put to the test. We are also monitoring the sector by individual stocks and have added a few new producers, developers and explorers of value lately.  I believe this is the best approach for capital growth.

We measure the performance of these stocks quarter on quarter in our Ratings Tables and have therefore followed the progress of the producers and developers very closely.  High gold and silver prices are driving the industry to perform and they are meeting the challenge to the delight of shareholders.  There is much talk of a gold mania and I do believe that the banking and political systems make this inevitable over the coming years.  The optimum way to protect yourself and grow your wealth is to hold on for the ride and to constantly do your due diligence on these companies to follow their progress.

Good trading / investing.
Neil Charnock
goldoz.com.au
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. ]]> http://thedailygold.com/global-gold-production-the-australian-gold-sector-2/feed/ 0 http://thedailygold.com/confidence-creeping-back/ http://thedailygold.com/confidence-creeping-back/#comments Wed, 23 Jun 2010 20:23:26 +0000 Neil Charnock http://thedailygold.com/?p=3678

By Neil Charnock

www.goldoz.com.au

News just to hand informs me that Spain is just about to do a “Greece” as their banking system is without funding. In the end this is not about maintaining global growth or the European Union it is about the survival of the financial system as we know it during this major historic transition. Gold is about to go through the roof and not just in Euro terms.

This is also a de-leveraging environment meaning that there is a scramble once again to sell assets and raise capital and gold stocks are temporarily caught in this downdraft. This is the most opportune distortion of fundamental value I have seen since the end of 2008.

The number of highly significant influences and potential disruptions is staggering during this period. These factors will all effect gold, currencies and gold stocks; therefore we need to keep on top of all this to be successful in our investing activities. This is the missing analysis from most simplified gold stock investment tools and models. This is a world of specialization yet one needs to be an all rounder to really flourish in this environment.

We will be moving the more advanced analysis of this nature into a newsletter that will form part of our Gold Membership subscription service as soon as we can. GoldOz is also in a transition due to political proposals afoot in Australia. We will continue to provide useful free snippets and international gold and gold stock coverage in these types of articles for the visitors of this web site.

History does repeat to some degree however the goal posts as influenced by cross currents, policy decisions and the timing of fat tail events present challenge to market participants.  The age old axiom of investing is buy low and sell high.  This is made more difficult by changing conditions, extreme movements and distortions at this point in time.

One old model used by all global funds and institutions is now broken.  This was the concept of the ‘zero risk’ investment for Government debt.  Even this is now broken as evidenced by the recent dip in interest rates on some corporate bonds to below the going US 10 year treasury rate. Some of our biggest companies were rated as a lower risk than the US Government. Do not underestimate the significance of this event as it points to further disruption and trouble ahead.

Required Understanding

The first thing to understand about this cusp area in the worlds economic history is the balance between the established economies of Japan, Europe and the USA compared to the emerging economies of China, India and Brazil.  Although it is estimated that at least a decade remains until the new ‘normality’ equilibrium is reached the effects are already very powerful economic drivers.

This is the area of hope for the world economy and it will continue to emerge and evolve. The growth in these economies has surprised many pundits both before and since the events of 2008.  These areas will continue to see greater capital flows and higher living standards.  They are likely to manage the developmental risks and challenges as we move forward and this will continue to influence Canada, Australia and Africa as resource supply giants.

The second factor to get straight is the unwinding of the massive debt load in the mature economies.  Balance sheet repair is a subject I have been harping on about for a long time now but it goes much deeper. This debt load is carried at Sovereign, State, corporate, small business and personal levels. This influence will be responsible for the most significant changes in policy, growth expectations and living standards we have seen in over 100 years for the established economies. This risk is what our investor clients are avoiding through gold investments.

This is long cycle change which is why so many investors are going to be caught unprepared. These people are looking back at the past ten to thirty years to explain current events without realizing the true significance of the current events.

This de-leveraging phase will cause muted growth in the mature economies for far longer than most investors and policy makers realize.  Cost of capital is going up as sovereign default concerns push higher risk weighting by major investors. The de-leveraging will take a long time and have to be managed as it will constrain the availability of loan capital.  Crowding out will continue as SME’s and Governments, corporations and individuals line up for new debt.

Unwinding of debt and de-leveraging will at times get disorderly. This can be exacerbated by policy change at times and we face such a time at present in Europe.  We currently await the implementation guidelines for such a mega change in the proposed de-merger of the proprietary trading arms of the US banks.  As usual the devil may be hiding in the detail or alternately the Obama administration may find the softest possible implementation strategy thereby managing the risk of blowing up the extremely fragile recovery..

Some disorderly economic or even climatic events will be out of the “normal” probability curve; these are referred to as “fat tail” events.  Debt which cannot be repaid will have to be monetised which must result in inflation eventually.  The search is on for a clean balance sheet that this debt can be shifted to.  By default this becomes a search for the least tainted balance sheet as in the example of Germany and the ECB at present.

Gold & Gold Stock Analysis

The fat tail events and distortions are of most interest to gold investors because this is where we will derive and amplify our profits before serious inflation sets in. Take the plunge in the Euro against the USD for instance and the effect this has produced on the Euro price of gold. European gold investors had been left out of gold price rises during times of strength in the Euro but that all came to a sudden end once the local problems really started to bite.

The same opportunity will be realized in each country in turn which will switch new investors into gold.  This was mainly a US phenomenon during the early stages of the gold bull, back when the USD had to come down from extreme highs like what we have recently seen for the Euro and the Australian dollar.

Here is look at the effect on the Euro gold price and how well gold acted as a hedge for Europeans during the past six months.

As you see six months ago the two scales on either side of the chart above matched in terms of the price of gold at about 800 Euro and US$1200.  This is where the axis were set of course but the point is that gold has not moved in USD terms however it has risen as much as 25% in Euro terms.  The recent 1000 point plunge on the Dow is another example of the kind of distortion I refer to.

We have been warning that the AUD would fall and this process has begun as the AUD carry trade unwinds.  This is a massively positive distortion for the local price of gold and a powerful influence on the local gold stocks.  However the gold stocks are presently weak heading into the last week of May and June as we said they would be.

This is due to de-leveraging and some hang over from Rudd’s Unworkable Super Tax (RUST). There is nothing further to comment on in regard to this proposed tax because the detail is not yet formulated.  I am not making a political comment or taking sides here.  The current Federal Government has to get re-elected first as well and they have lost a lot of friends in Queensland and Western Australia just for starters.

It is interesting to note the distortions of the AUD: USD ratio and the effect on the AUD gold price because this has been an important medium term influence on our gold stocks.

As you see above the gold rally in both currencies moved in lock step until about April 2007 when currency gyrations began to become more extreme.  The relatively poor gold stock behaviour in Australia was obviously influenced by the rise in the AUD which depressed the rise of the locally priced metal.  Higher interest rates in Australia had set up ideal conditions for a carry trade creating additional demand for AUD driving it higher. Because we are now heading in the other direction at present it is worth looking at what happened when the AUD fell in the past.

At the end of 2008 the Australian gold stocks made one of their best moves for the entire gold bull to date accompanied by that spike you see for the AUD gold price to nearly $1600 per ounce. This was on a significant fall on the AUD as we are currently seeing. The large gold producers that quadrupled from panic lows in late 2008 did so very quickly because they were wildly profitable at that time.  Many of the leading producers have flat lined into a large trading range ever since due to the recent carry trade and ever rising AUD to the 94c level against the USD.

The AUD is currently under US81c as I write this article and the AUD gold price is over $1,470 even with the fall in USD terms.  This is once again wildly profitable for our gold miners. Here is the strategy for our offshore investors.

The AUD still has some down side however this is diminishing thanks to deterioration in global economic conditions.  This has taken the pressure off our prime rate as the RBA may not have to raise rates more to curb housing prices.  Retail is weak and domestic mortgage rates are set to rise even without the RBA moving a muscle.  This is because the vacuum created by the exit of the carry trade has removed billions of dollars from the local banking system.  The local banks now have to go offshore and bid for more expensive capital for an estimated 50% of their lending requirements.

As we have been warning, and the news on Spain will only increase this problem, the COST OF CAPITAL is rising. This makes our debt analysis on the local gold stocks more important than ever and we will be increasing the focus on this soon.  Zero debt and low gearing are becoming more and more attractive.

Heightened risk factoring and the remainder of the unwinding of the carry trade will send the AUD down further making a truly exciting entry point for foreign capital some time soon.  If this capital were to find a home in our cheap emerging and established gold producers sector it would set up the best investment opportunity I have seen since October and November 2008.  Cheap dollar and cheap oversold gold stocks; it does not get any better than this.  It is very close to the perfect time to start layering your gold stock trades Down Under.

When these gold stocks next peak you should be able to take a currency profit and a share investment profit if you get this end of it right.  As a contrarian I am now extremely excited about these stocks. I have deployed approximately 30% of my own share investing capital at this stage.

We have just completed our latest version 8 rating table file and included the proportion of onshore production.  There is unique analysis provided to make sense of gold stock valuations and tables with all the essential data on the producers.  This is available to Gold Members at our site and I hope to see you there so we can assist you if you are interested in this opportunity.

Good trading / investing.

Neil Charnock
www.goldoz.com.au

GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

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.

By Neil Charnock

www.goldoz.com.au

When the Rudd Unworkable Super Tax (RUST) was first announced I stated that we may not be the only ones here in Australia to suffer from this type of tax.  Governments in many countries are worried about falling revenue as economic contraction bites. Plucking the goose that lays the golden egg is now thought to be contagious according to Evy Hambro of BlackRock Investment Management Ltd.

This could mean that the selling of the Australian gold stocks was over done leaving them now heavily oversold. We have had our ‘Swan dive’ so it is already factored in for now.  The dive started two weeks ahead of the announcement of the tax proposal in the media. The industry is smarting and negotiating and I support them however I can.

I have forecast that the gold stocks would be fantastic buying “at their best in May and June” this year and have not been disappointed.  I am gradually loading up and have just completed an update of our Rating Tables in the Gold Members area.  This is a first in terms of unique presentation for analytical clarity. We have scaled market capitalization alongside production and gross operating margin so that value can be compared in a unique way.  Understanding of gold stock valuation is a complex matter we seek to educate investors about.

I have also forecast volatility for this year since my first article and am not disappointed.  I stated in my opening 2010 article that I could not see past the first half of this year and I was over optimistic by a month or so.  The rally that began in March 2009 is now over and the new game begins.  The questions are; how do we make money and how do we protect our finances from this now.

Local opportunity

Even on this sell off on gold the AUD gold price is currently $1435 (AUD at US83c) as I write and this is a highly profitable level for our local producers.  Forced liquidity driven selling is dropping fantastic bargains into waiting hands here.   Now that the AUD is dropping the offshore investment community can start to look at their spreadsheets and do their homework.

Update your Fx forecasts and gold stock analysis because this is going to be incredibly exciting.  Leverage will be fantastic for investors that get set in the next one to two months.  Offshore investors that get organised and transfer USD’s into AUD’s at the right time to buy this sector will be rewarded by the double whammy of price appreciation and a currency bonus when they sell.

The question is when do I pull the trigger?  We have to look at the current crisis and anticipate how it will play out to answer this question.  We have been talking about Greece as the start of the problem nearly all year and warning about the AUD fall.

Perhaps the forecast in this article will turn out to be near the mark as well.  This market is not easy to pick however if you consider the history of sovereign defaults and debt crisis evens of the past we do have precedent.  We have not seen it on a global scale before however at least some of the fundamentals will hold true this time.

Is it is different this time?

An interest rate / sovereign default crisis is a very different animal to GFC1.  Credit crises are slow and cumbersome in comparison compared to what we saw in 2008 however more deadly. You can see this one coming more clearly however there is nothing that can be done to avoid it except perhaps on a personal level. There is no easy way out this time. This is the inevitable debt crisis that we had to have after building the largest global debt bubble in history.

Wild currency gyrations will accompany justified sovereign liquidity concerns and gold will rise because it is the only ‘currency’ safe from this. We have already seen the Euro fall 25% to the lowest level against the USD that we have seen in 4 years.  This is all relative weakness compared to gold which happens to be at record highs even against the USD.

Stage 1 GFC2

At first we have the shock (couldn’t market participants see that coming?) of sovereign default fears and this de-leveraging period to cover debts, reserve ratios and margin loans. This is a liquidity driven sell off that will manifest in stages. Even gold is prone to selling at first however total demand will soon over run this selling against a limited supply.  This period is also the opportunity of a lifetime to buy precious metals and quality gold stocks ahead of a parabolic rise.

Next step we get endless bailouts and more spin instead of fiscal responsibility as Governments still mistakenly believe they can put this debt fire out with gasoline (more debt). Sovereign bailouts will initially require printing of more and more paper money. If they tip the scales too far we lose total confidence and we get hyperinflation. If they can measure this for a time and get some sort of balance right then we get a continued rise in doubt, fear and gold along with the quantitative easing.

The slower more insidious nature of GFC2 will confound investors that are selling their gold stocks here. This time the banks will need bailing out again however it will be more orderly and indirect this time. This is a vital difference between GFC1 and GFC2.

The printing of money by Governments to cover their junk paper (T Bills) will indirectly result in the banks redeeming their sovereign bond investments back through the front door this time. Remember they (the banks) buy most of the T Bills because they are zero risk weighted assets and hence no reserve requirements.  They also get a guaranteed return enabling them to build back their loan books and balance sheets. They will not get into trouble at home by buying Government paper and the Government will have to print to cover the redemptions.  What a nice happy circular transaction.

The fall in markets will not be as sharp this time as a debt crisis unfolds slowly.  Gold will be well bid this time. The lack of liquidity in the system will be bad for economic activity and raising rates will also hit SME’s hard once they reach critical levels.  The defaults will kick in gradually. The spin will come and go as we lurch from one phase of the crisis to another. First we see Greece and contagion in Europe and next we will see it break out somewhere else.  The biggest event will be the USA phase which may even come in stages too.

Distress funds are being set up to take advantage by those who can amass sufficient capital and have the know how to do so. The velocity of money in the global banking system is slowing too, a function of tightening credit.

I will keep buying quality, low geared un-hedged gold stocks and metal to the limit of my financial ability.  The AUD will keep falling in stages. I have written here and elsewhere that this would happen and it is.

Falling AUD and rising gold is brilliant for earning money if you are an un-hedged Aussie producer. Debt free is a bonus. This is a time to protect your wealth, however large or small it may be. Join us at GoldOz as a Gold Member as we cover this important sector of the gold markets by providing the essential data and educational files.

Good trading / investing.

Neil Charnock
www.goldoz.com.au

GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

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.

It has been a hectic week here educating clients about global capital flows and debt cycles. One of the really interesting factors at play Down Under has been the unwinding of the carry trade which accelerated last night. The message it not always understood so I will be preparing a file to explain how this works as further education in the Members area of my site as soon as time allows.

I have been warning that the AUD is an exotic currency and this means that when risk aversion increases the AUD gets dumped. When I hit the office at 7am this morning it was down to US88.6c off approximately 3c. We have been waiting for this opportunity to start to unfold for our offshore clients and warning this would happen in articles like this one.

We have several negative influences in the markets at present. These are the Australian resource super tax proposal, global sovereign debt issues, the growing wild fire in the banking system in Europe and the unwinding of the carry trade on the AUD. Global appetite for risk is diminishing rapidly. To add further woes we have the end of Australian financial year sell off merging with the “sell in May and go away” seasonal factor and a potential explosion of margin loans which have built up here again since the 2008 debacle.

I have been pointing to a top in April and buying opportunity in the gold mining stocks here in Australia during May and June. This was forecast before any of these fundamental developments emerged. That is not to say I did not see Greece coming I have been warning about it for months. There was no way to really tell when it would hit the “reality” threshold and threaten markets sufficiently enough to see a reaction.

The crisis in Europe is still unfolding and at present the holders of Greek bonds can still go and borrow money against the asset from the ECB. That could be about to change however due to the looming refinance deadline. Therefore I have to warn investors that the credit conditions are potentially about to get worse not better. Banks in Europe either cannot get new capital or the price they are being offered is above the threshold of commercial viability. I heard 8.5% was the best rate offered for one European bank this week.

I have been warning that the cost of capital is going up and now I have to warn about this again in stronger terms. Cost of capital is going up sharply and this is emerging now. Here comes the next credit crisis (I wrote this yesterday and finishing off this morning).

We are therefore looking at producers with strong balance sheets and minimal or zero debt. Interest rates are on the rise in Australia and the unknown surprise to come here is that our banks have to go to the international credit markets to raise capital to lend. Therefore it will not matter if the local BA rate is held at 4.5% or not the banks will still have to keep raising rates.

You will have heard there is a new tax proposal on the table here Down Under which should never have seen the light of day. I am not getting involved in the public political debate however I have posted a major in depth response to the Governments Tax proposal for my Membership base. We also posted a list of locally listed companies with offshore projects that would not be subject to the proposed tax. This group of companies will have more flexibility to move their head office offshore and if necessary de-list in Australia if push comes to shove.

Investors may have temporarily lost confidence in our mining sector and I am not surprised. Remember though that this is NOT legislation and would not be brought into law until after the next Federal election later this year. It could be blocked by the opposition and it would also have to pass the Senate so this is NOT a done deal. I wrote recently that we had to see how this pans out as we did know the Henry Tax Reform Report was due for release. I was talking about the detail and now the cat is out of the bag the mining companies are assessing their options. I am speechless that the immense knock on effect is being ignored by the Government and will leave it at that for now.

What we have to focus on for now is the stocks that have offshore mines and are therefore not affected by the proposal. Canada also looks great now, even better than ever and we are shortly moving to assist our client base to understand opportunities on the TSX. The Canadians are sensibly offering sovereign protection at a tax rate of 25% as they are not the only ones that smell opportunity.

Emerging Opportunity

Previously I warned of a top area in April and have been suggesting that the gold sector would present premium buying here during May and June. We have been seeing a stock panic over recent trading days and weakness is the theme as profits are wiped off the board.

Level headed elite investors buy undervaluation and sell overvaluation to amass their fortune over the fullness of time. Many less experienced investors grow despondent as share prices fall eventually selling undervaluation. This latter group often get over excited by good news and buy overvaluation or tend to hold hoping for greater overvaluation at price tops.

Gold stocks Down Under were already undervalued in many cases and now I would suggest that we are likely to see a massive undervaluation develop in the coming several weeks. For US investors I would want to see the USD: AUD ratio rise significantly. This would enable you to send funds to your own Australian account here at a favourable exchange rate to snap up super low bargains.

The behaviour of gold overnight suggests to me that investors are buying paper gold at last and shunning paper notes that promise gold. This is both unallocated gold and it is also fiat currencies. Confidence is diminishing and I am so glad I have been getting my direct clients out of most stocks these past several days

The global conditions I have mentioned above are likely to cause this condition and immense opportunity. When the tax proposal fails in the coming months the temporarily tainted sovereign risk status of Australia would be reversed. This will not be necessary for excellent returns however it would be a significant benefit. I would rate the chance of this as quite high especially given the worsening of stage 2 global financial crises.

When I say some of these gold stocks Down Under are undervalued I am not overstating the fact. Just one example of this is the forward P: E ratio of an emerging producer that has no debt or hedge exposure. Working on forward projections brings me to believe this figure is approximately 2 at yesterday’s valuation. Their current valuation is not far north of assets plus cash valuing their gold at nothing.

The falling AUD is also a benefit as there is a strong possibility that our dollar will fall faster and further by percentage than gold. The AUD has fallen ahead of any major correction for gold so far sending the AUD POG to $1360 after a long consolidation around the $1250 level. This means that producers here are being marked down when their profitability is increasing dramatically.

Get aboard for your Gold Membership at GoldOz and get your homework done this will be an opportunity you do not want to miss.

Good trading / investing.
Neil Charnock
goldoz.com.au
GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.
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.

Isn’t the world an interesting place at present!  When the historians look back and decide what to write on the history for this time period they might as well use the heading “it seemed like a good idea at the time”.

The Australian Central Bank (RBA) raised interest rates to 4.25% here yesterday.  I was talking to an industry professional today about this and used the analogy that Australia could currently be likened to a car driving down a highway with two drivers.  One (RBA) is applying the brakes and the other (Federal Government) is trying to accelerate and turning up the turbo boost.

The reason is that these two drivers have two different purposes in life.  The Federal Government wants to produce growth and jobs for the good of the country, and to get re-elected later in the year and the RBA is there to control price inflation amongst its other monetary duties.  Meanwhile, outside the ranch, the world continues on its own course and although many here think we are doing OK (isolated from the US, European, Japanese, UK difficulties) the truth differs wildly from this illusion.

Yes the US has produced some modest growth however this might have something to do with inflation (money printing) and the not too small influence of money tracking back to the USA in the corporate sector.  Fact is that last year the Obama administration changed a law and made all global earnings of its corporation’s taxable in the USA.  Therefore money that would have otherwise stayed offshore to be invested in favourable tax havens returns home to the USA instead.

That has been influencing growth as it represents a significant capital flow.  Apart from offshore sales offices these corporations are returning a significant proportion of their operations back into the USA.  This is not good for the Asian business centres but it has no doubt added some strength to the USD.   You could be cynical and state this has been a stimulated and repatriated recovery but we will take any recovery we can get.

10 year Treasuries have broken through 4% and the US banks are playing the yield curve and the best thing for them is that this investment requires no reserves.  So why lend to SME’s (small to medium enterprises)?

Stock markets have been an interesting point and on the 5^th January this year I bravely stated:

“The stock market reads future trends and outcomes at times and has factored (government sponsored) growth this year. Thanks to the vast overflow and after effect of the stimulus capital flows this will come to pass initially and therefore I consider that the highest probability is that the stock market rally will continue in the first half.”

The ASX in Australia has trended sideways to date this year while our dollar has trended basically flat against the USD and Yen.  The AUD is up sharply against the Euro and the Pound however indicating to me that our stock market has risen in relative terms for offshore investors based in Europe and the UK.  Foreign Exchange (Forex or Fx) analysis has never been more important for investment decisions in our opinion.

We expect to see a further spike in the USD short term giving US investors a fantastic chance to get some funds out before the USD recommences its down trend.  The Dow has done exactly what I initially thought it would and continued the trend making new highs for 2010 this month.  That was a brave call however here is the rub, that stimulus money has not been withdrawn at this stage and everybody wants to believe in the growth story.  The system is still reasonably flush and the funds are playing in this market.  The banks are still rebuilding their balance sheets.

Pimco, the worlds largest bond fund has pulled away from the US and European Bond Markets to focus on Australian, Indonesian, Philippine, and South Korean debt.  Their concern is about the unwinding of stimulus and the danger posed to recovery by new financial regulations.  To be specific they fear politics poses severe risk of “policy mistakes”.

This is not fresh news so why do I mention it?  I mention it to support what I have been saying about the global debt markets and sovereign risk.  You can tell people something at times and they do hear you however many will fail to understand the significance or ramifications of what you are trying to convey.   Cost of capital is going up and debt is going to become more and more expensive to service.  This is not good for growth going forward the bursting of this bubble will be heard from Pluto.  Will it come on quickly?  The answer is no – I will be writing on this topic and  what it means for the gold stocks Down Under and for gold in the coming months.

Moving forward

My prediction is that Gold is going to around US$1400 before the end of 2010 driven by uncertainty over sovereign ratings (ability to service debt), currency instability, monetary demand and investment demand.  One of the key drivers for these dynamic forces will be the currency fluctuations and associated capital flows.  Gold has been acting like a currency and will go up relative to all currencies.

Some currencies will be hit harder than others which will equate to a greater opportunity for gold stocks.  The movements will create danger and opportunity for investment flows and we will be talking close notice of these trends as they emerge.

I believe we could soon see a short term launch up to the US$1180 area for the spot gold price. I first penned this paragraph when gold was under $1100 before Easter.  As we have just risen quickly I would not be surprised to see a small pull back now in the POG before it heads higher here.  If I am correct this will be a welcome rally however this move may get confused with a break out.

These following paragraphs are also a week old now but here it is for interest sake:  Why do I suggest we could see a short term gold rally shortly?  Where are my technicals?  We are stuck in a price compression which gives no indication of direction on the break so the gold price could go either way.  I have been reviewing the gold company chart set in my Members area, looking for indications, literally wondering why I am forming this opinion.

There are already some signals that some of the short-term down trends are now exhausted in a few of these stocks.  Other stocks are already up-trending and may have some further short term upside.  A few flat liners in base formations are showing signs of life after death. There are also signals from the leading ASX listed gold stocks to indicate that they are leading the way for gold.

Apart from chart patterns in gold itself which could potentially be pointing to a rise I look to the XGD.  The Australian gold sector bounced strongly off the 5100 area some weeks back with a powerful buy signal as I highlighted at the time. In fact I alerted my Gold Members to this as potential support before it probed down there.  After a jump and some consolidation since then the XGD looks like it could easily have some upside.

The rest of my reasoning is from the behaviour of the share price action lately it does not roar like a bear or look like a bear so it probably isn’t a bear.  To add weight to this for my own reasoning I just have a gut feel we need to see a rally before the end of the financial year which in Australia is at the end of June.  The most logical time is April for this to occur.

Conclusions

We usually see a false break out before the real deal towards the end of consolidation periods and this is not likely to be any different.  This type of event is part of short covering and traders getting set in their positions.

I have sat through many of these consolidation periods in gold this past 9 years so I am used to it.  They are important to get people used to higher price levels.  They assist an orderly sustainable price rise no matter what holds the price back.  I don’t see the major break upwards for gold until early in the second half of 2010.  In the meantime the bears are being disappointed yet again as another higher base is formed.

Sentiment in the Australian gold sector has been very poor lately and this is good news for contrarians as we gear up to re-enter at favourable prices.  This next (false IMO) break out will bring back some support into April however the May to June period will probably represent the best buying for most stocks in this sector.  I could almost construct a sentiment index by graphing interest in GoldOz and I am sure many other gold sites are the same.

The right time to subscribe to these type of services is actually now, not near the top when it is all over.  The only benefit you might get near the top is help with when to pull out so if you have no stocks then there is no point.  When sentiment is right down, such as times like this it is time to do your due diligence very thoroughly.   This can be a lengthy process as you may discover that a particular issue needs to be handled by the company before you take a position.  So you watch and wait for things to progress and for technical signals to trigger your entry points.

It takes a great deal of time to carefully select the right stocks from the large selection on offer.  The sector is so fluid that it is hard even for full time analysts to keep up with events.  I believe this rally right in front of us will assist us to determine which stocks will do best with greater accuracy once the real break out begins.

In the past few months we have seen finalisation of take-overs; mines change ownership, new floats, capital raisings, and companies moving into production, exciting drill results and all sorts of activity in this gold sector.  Behind the scenes these businesses are making great progress to reduce costs, reduce risk in their balance sheets and progress their operations.  This is an exciting time in the evolution of this gold sector as a whole.  The excitement this week has been the proposed merger between Lihir and Newcrest which was instigated by Newcrest.  Lihir has initially rejected this proposal.

I am preparing two reports now; the first is a higher risk company with a fantastic ground position and a chance to advance strongly in the coming rally.  The other is set to continue to reduce cash costs and undergo a re-rating over the next gold up-leg too.  I believe it could outperform its peers.  In both cases I will do my best to time the release of the reports to optimise timing for this “educational” opportunity.

Good trading / investing.
Regards,
Neil Charnock

goldoz.com.au

GoldOz has developed a basic Member area and a Gold Members area with substantial investment tools.  GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

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.

Greece Exposes Future & Opportunity

By Neil Charnock

goldoz.com.au

We are looking at a high probability of a rally in the gold price in the coming weeks which will spur gold stocks into upward motion yet again. This is suggested due to fundamental and technical reasons. Inflation (of the money supply), increasing demand and coming uncertainty as the sovereign debt crisis gradually unfolds are three of the key fundamental drivers going forward. The pace of the increase in the money supply is increasing and causing distortions that are essential to understand.

There has been a staggering US$2.59 TRILLION in Treasury Department sales since the beginning of 2009. Spending is still increasing not declining as the US looks to blow-out (easily exceed) its projected deficit of $1.6T. Could we now see a massive new wave of liquidity in the global system in response to national defaults?

When a country becomes insolvent it is not forbidden to continue to trade as companies are here in Australia. I do not know the individual laws around the world on this issue however my point is that a country is vastly different to a bank or company.  A country different and an unsustainable deficit and debt is different by magnitude and character to a bank or company insolvency.  It is obvious that a country has no choice but to continue to trade.

Countries have mechanisms that can enable it to borrow money offshore and print money if it is no longer unable to borrow.  That is unless you are part of a monetary Union like the Euro in which case you have to turn to the other members of your Union or the IMF for help.  Outside this experimental Union we are running an experimental unbacked global reserve currency which also seems to be unravelling.

A country outside the EU can print all it likes in theory however if this is done to excess you can eventually end up with a post WW1 Weimar Republic Germany or post WW2 Hungarian hyperinflationary scenario.  This is caused by excessive printing of the local currency to a point that all confidence is lost. Confidence in the once mighty USD is waning alarmingly and creating uncertainty at this point in history although it is not a forgone conclusion that it will develop into a full blown hyperinflation.

Markets do not like uncertainty which will be on the increase this year due to debt issues with Portugal, Italy, Greece, Spain, the UK and the USA. There are three major factors you have to get right to make money from such a situation.  These are; predicting and timing the gold price movement, selection of the right gold shares and currency movements.

I have been talking about the likelihood of currency fluctuations and upheavals for this year.  I still believe this is very important for you to consider and weight in your investment decisions. It will have a strong positive effect on gold in all currencies as central banks and large investors are attracted to gold as a hedge or investment.

I opened 2010 (January 5^th Outlook for 2010 and A World First) with a very brave statement; “This year will initially see a continuation of the trends established in 2009. I understand that this seems like a bland statement. The stock market reads future trends and outcomes at times and has factored (government sponsored) growth this year. Thanks to the vast overflow and after effect of the stimulus capital flows this will come to pass initially and therefore I consider that the highest probability is that the stock market rally will continue in the first half.”

It looked like I had been wrong after mid January when markets corrected however we have just marked new highs on the all important Dow and it sure looks like I was correct at this stage. The point of telling you this is to give you some measure of confidence that a crash is not imminent.  Many investors are perplexed by this situation and know things are not well at all.

The next crash will be different because the nature of sovereign debt is of a different character as stated above.  The debt bubble has to pop and the “all is well” can only live in their make believe for so long until the music stops but for now we can make money by investing wisely.  We have an insight into the future from what is happening before our very eyes at present so it is important to take notice and observe.

Window (into) the Future

We are seeing very interesting developments in Greece and it must be uncomfortable for the Greek Prime Minister George Papandreou who is (apparently) not going to be bailed out by Germany. This is particularly interesting as it gives us an insight about the same ramifications for other nations with unruly deficits.

The risk premium on Greek 10 year bonds is increasing which does not auger well for the upcoming funding of bond redemptions in April and May. This means that this problem is not going to go away and instead it is highly likely to grow more intense. Greece is recognising that their higher interest rates are unsustainable and are attempting to reduce their deficit to 8.7% from the current rate of 12.7% of GDP.

The real problem is that rising borrowing costs are going to eat away at any gains they make in their quest to repair their national balance sheet and restore growth. Greece has faced two general strikes this year already as the government tries to cut back on spending. Unfortunately growing social pain and unrest is another growing trend as we go forward. This is why we all need to up to speed on Fx (currencies) and the precious metals sector as a way of maintaining our prosperity.

European Central Bank President Jean- Claude Trichet and French President Nicolas Sarkozy are not happy with the PR this Greek situation is concentrating on Europe.  They do not like the IMF “bail us out” option being suggested by Mr. Papandreou as they feel it indicates the EU cannot handle its own problems in house.

If anybody thinks that this is an isolated case they had better get up to speed on the growing sovereign debt crisis.  This is the future of many nations along a path that will eventually lead back to the mighty USA.  The future will feature a rising cost of debt and crowding out as borrowers line up to roll over or secure new debt.  This is a credit crisis on a scale the world has not seen and this brings me to the subject of opportunity.

Most people lose money in a bear market however if you keep your nerve and are educated it is the optimum time to make money.

This phase of the global financial crisis is different in many ways.  When the manure finally hit the fan last round the banks would not lend to each other and now it is countries instead.  Governments bailed out the banks so who bails out the countries if they can’t bail out each other?  The answer is the IMF which will have to write off some debts and the Central banking system will also print new money like there is no tomorrow.

Gold and Gold Stocks

Gold is going back up once it is ready.  I don’t care if the gold stocks lead the way this time or not as the fact is that the leverage will be greater for investors who buy the shares.  This is right and proper as you therefore take on risk whereas the metal carries virtually none.

I am preparing a new company report as an educational piece on how to spot, time and value a recovery gold stock investment.  I have sought and gained approval from the company which clears the way.  The last two reports have been screaming successes and I thank those who sent the feedback as well as those investors that benefited as it is a pleasure to serve you and the companies by writing about their story.

The whole gold sector Down Under is about half price on average compared to pre-crash levels even with a currently high Australian dollar. We currently have a AUD$1200 gold price which is highly profitable for the lower to medium cost producers.  The exciting thing is that we now have limited down side and significant upside for the sector.

Gold and key energy stocks are just two ways to benefit from understanding a bear market.  Cash will become such an important investment class at the right time as it will rise in value against general stocks, bonds and property faster than most investors can imagine.  Take some time to understand what happened to property values in Japan and recently in the USA.  We will be covering education on these topics in the GoldOz Gold Members area on this more as time moves on.

For now if you are in property (apart from for your own use) you should be looking at Japan as your model and adding higher interest rates into your modelling. If you cannot imagine interest rates over 15% ever again then consider we are looking at years of higher interest rates ahead (slowly at first like all bull markets).  Imagine you have $2B and are considering a bond purchase from a government that cannot keep its financial matters in order – what risk factor would you need to be enticed to invest under these circumstances.  Look at Greece and their recent markedly higher interest rate experience and “smell the roses”.

If you think we did OK in Australia during phase one of the GFC then imagine a new and different phase that includes very high interest rates for all the wrong reasons.  The wrong reasons will include fear, risk and uncertainty.  You want to be in the right position when all this peaks and it will so it will really help if you understand Fx, interest rates, debt cycles and how to invest in the right stocks.

For now I am concentrating on gaining benefit from this current market opportunity for my Members via articles, site content, comparison products and special reports. You are welcome to join if interested we are growing rapidly. Remember that some of the biggest and most influential funds in the world are investing Down Under in this gold sector.

Good trading / investing.

Neil Charnock
goldoz.com.au

GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

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.

By Neil Charnock

goldoz.com.au

I have fantastic news to report this week.  The XGD has formed a powerful buy signal indicating that the way forward is up again for the Australian gold sector. I have shown this signal in the daily XGD chart below with some resistance levels overhead which we are currently cutting through with apparent ease. Chances are that this will continue and that the awaited second leg of the gold rally that began in September 2009 at around US$954 is now back on track. Firstly let us take a look at gold.

This is the long term chart and simplified pattern of the upward price of gold.  The long consolidation patterns are easy to define.  Each successive rally is larger than the last and you can see that once the horizontal consolidation top was breached in the chart above we saw a double leg rally marked in Part A and Part B.  The good news is that Part B is just beginning for this up-leg.  The patterns are never exactly the same and the scale gets larger keeping us fractal fans on our toes.  The consolidation between legs this time around at the larger scale took longer than the first pattern possibly due to scale and the Christmas break in the middle of proceedings.

Part B was also slightly larger than Part A in the first pattern and therefore there is potential for the second leg to run to around the USD$1370 – 1400 area.  Now to the XGD index Down Under. The buy signal divergence is clear below on this chart so it is in agreement with gold.

Daily XGD chart

The XGD index is dominated by NCM which is our biggest gold miner.  This company just happens to be amongst the world leaders in terms of production, valuation metrics and global diversity of operations.

This is just another example of the global status of Australian mining.  Take BHP and RIO as further senior examples and you can quickly imagine that Australia is not really off the beaten track as many investors imagine.  Several of the top North American funds and many major banks have a stake in our gold industry which backs up my thesis nicely.

You might ask why?  Globalization and internet information flow have now reached a stage where the Australian gold and mining sector will have to be valued in terms of global valuation metrics which means the current undervalued status of the mid and lower tier miners will not last.

Given the underlying strength of the fundamentals for gold one can quickly see that this will enable considerable additional leverage on capital returns over the coming years. The investors that come to understand and exploit this sector now will reap the rewards.

Here is a longer term (weekly) view of the XGD and you can see the solid bench this index has formed in between the two horizontal lines.  In the top of that circle, if you look carefully, you can see the move today.  There are some resistance levels at 5700, just over 6,000 and up at around 6,300 to be overcome before we can move up to tackle the older 6,900 level and blue sky.

Australian Gold Index – XGD Weekly

Security of tenure and other sovereign risk issues are extremely important to miners due to the significant capital investment and time taken to bring a project to fruition. Australia rates up there with Canada ahead of the USA leading the world by this benchmark as well.  Our status has been improved throughout the financial crisis. This factor also carries a significant weighting for investors and rightly so.

I am not being patriotic here I am giving you the reader a heads up. Australia is positioned as part of Asia and an excellent place to do business.  We are an excellent prospect for overall strength in our currency in the long term and therefore Australian resource stocks represent an opportunity for the global investment community as a hedge.  Currency gyrations are going to get severe and I am not saying Australia will avoid severe ups and downs. Our currency market is small much like the silver market so beware we can be just as volatile at times such as in 2008.  However just look at the recovery since.

What I am saying is that the long term security of your capital investment in Australia will be superior to the USA, Europe, Japan and the UK if you choose the right sector.  Selected mining stocks including energy, gold, rare earths and specialized metals will assist you to maintain your asset values while other asset bubbles burst.  You could be looking at a currency benefit and an investment gain if you get it right – a double whammy for your investment capital.

I believe it is the emerging gold and energy stocks that will out perform however the large stocks lead the way and this process has begun.  The Australian dollar is just one of the commodity currencies so a basket of prime candidates in China, Canada, Brazil and Australia should all do well.

About a month ago I announced that the markets were “Oversold” and they have barely looked back since.  We first alerted our Gold Members to the 5100 support level on the XGD and it held twice after that.  Today the XGD broke through the first significant level at 5600 backed up by all of the leading components in the XGD.  Many Australian gold stocks have just printed powerful buy signals and will now move forward back to test the highs of 2009 in the near future.

I am preparing a brief report this week on these technicals for Gold Members.  Our recent upgrade to the Ratings Tables should give investors the ammunition to further their own research and pull the trigger on the better prospects.

The Australian gold sector has acted very intelligently as a whole by raising money while the going is good.  As the debt bubble eventually bursts capital raising will be harder to accomplish.  Having said this however I believe that the gold miners will be one of the few sectors of the economy that will attract investment capital. They will be part of an elite group that will be able to secure borrowings.  Now we come again to the cost of borrowing.

Greece heaved a sigh of relief last week on news that it had put its 10 year bond to bed at 7%. Europe joined in the cries of relief that this was overcome but hang on a minute guys are we missing something.  This is providing us a benchmark indicator of how sovereign interest rates will act on funding difficulties this year.  Bank rates are generally about 2% above sovereign rates, corporate and retail rates even higher again.

Careful of asset price devaluation ahead

The outcome is that funding is getting more expensive and this is the new trend for any country facing over extended budgets and deficit issues.  Now imagine what has to happen to asset prices in Greece on a 300+ basis points rise in interest rates overnight. In case you can’t imagine this it is not a pretty picture.

Australia just put rates up 25 basis points again to try to ease the latest government created property asset bubble (on top of the other real estate price bubble) but imagine what would happen if that interest rate rise was over 10 times this level. Most Aussies are living in “La La Land” and thinking that we did so well through the global crisis so all is well for property even in a rising interest rate environment.  I heard a comment that many Aussies now prefer Real Estate to equities.

Well they are going to be hit hard when things reverse as their precious property investments will not be liquid. That means that by the time they realize they are wrong it will be too late. Banks that are fighting for market share up at these levels are going to take a hit too but nothing to the extent these poor misguided investors will.

The smart money is still moving into gold and gold stocks around the world.  Now that the smoke and fear of the recent minor correction is over the gold stock prices are heading higher once again here in Australia.

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 recently 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 1^st) on the GoldOz update page and you can down load it for free if you are interested.

A major gas deal was announced today resulting in a 46% gain in that stock and renewed excitement in the gas sector – so both gold and energy are still the place to be.  I have also provided a link to a special report on tax changes and legal solutions available here – special file link

Good trading / investing.

Neil Charnock
goldoz.com.au

GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.

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.