All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

This kicking of the can down the road is all about buying time for the financial institutions to repair their balance sheets.  This expensive ‘time’ purchase is considered the only way out by governments that don’t want a collapse on their watch and because there has been a very real danger of a total collapse of the entire financial system.  The counter party risk of this intricately linked system is highly dangerous thanks to the size of the debt, derivatives, credit default swaps and now the bond market bubble.  This is all key to understanding what I am about to say about gold and how it fits.

The debt bubble formed over a long period and this turbocharged growth creating a new modern perception of growth expectations.  By the time this bubble matured investors had long forgotten about normal growth trends which were much slower when averaged over time.  Now we face the debt collapse.  A debt collapse is a slow collapse.  It is a death from a thousand cuts and this is what the world faces over the next decade at least.

I do not literally mean ‘death’ I do not see the world in total collapse, back to the caves,  as we have a good chance of muddling through eventually thanks to the efforts of mankind.  I remain a realistic optimist.  The system as we know it will certainly die in the end however I prefer to hope for an evolution of sorts which will result in a transition period rather than total collapse followed by the rise of a phoenix from the ashes, a genesis that might otherwise need to arise.

At least I can see the train coming whereas many politicians and most investors don’t as yet.  The ‘growth will return’ mantra still plays its song despite the headwinds.  The combination of the 1) debt bubble and 2) need to keep the music going to avert disaster are both factors we need to weigh up in any investment strategy.  The subsequent money printing creates an ideal investment climate for gold.  Negative real interest rates are likely to persist while the governments monetize the treasuries.  This keeps rates lower and raises the level of cash in the rest of the system – cash that has to find a home.  Some asset classes delever and some rise in value as currencies devalue against them.

This is all quite simple to understand however much harder to fix without tearing down centralized power and the debt bubble for a fresh start.  The key to maintain your wealth or create wealth from the situation is to work out the direction of the next capital wave.  You do this with in-depth research and you need to take note of what the big money is doing.

Now back to the banks – they need to continue the repair of their balance sheets and this can and will take several years yet.  They cannot mark all their assets to market and they cannot reclassify many loans as non-performing.  This would wreak havoc with their reserve requirements.  They are already buying gold because they know that it will become a tier one asset that will also act as a hedge.  They know how large the hole is and this is a life boat for them too in my opinion.  This will be the biggest game changer for gold since the Chinese started to roll out their gold retail infrastructure.

I am saying that non Central Banks are buying gold as well as the Central Banks.  This is in preparation for a upcoming total acceptance of gold as a first tier asset for reserve ratios.  Think about the difference this can make to the gold market.  Imagine banks in favour of gold rising because it improves the capital adequacy in the system; why that is revolutionary.  With many asset classes in decline and the need for the banks to try to repair their balance sheets gold becomes a very special asset class indeed.  The Central Banks will be just as happy about a rising gold price in this case, based on demand from their sector as it will act as a stabilization factor in the system.  This is the game changer I speak of for gold.

And speaking of gold I see the late 2009 to March 2010 consolidation pattern is now complete in the present time frame.  The break out preceded a sharp spike then too and was followed by a triple W shaped consolidation formation.  The second low took us predictably back to the 300 day moving average which I wrote about back in 2006.  Now we are looking like a breakout is possible at long last.

Now to gold shares and the game changer is clear.  The monster and elite funds of the world have begun to appear on the ASX gold stock substantial holder notices.  They have been accumulating as the market fell to undervaluation extremes.  Now we have an elite Chinese entity Zijin Mining Group Co., Ltd taking a partial control (takeover) play on a highly undervalued Kalgoorlie miner.

Their Chairman announced their plans to set up an overseas financing platform for its foreign assets.  They plan to invest as much as 5.5 billion yuan ($880M) per year buying gold mines and companies, mainly overseas he commented according to businessweek.com over the weekend.  This is just one interested Chinese buyer soaking up gold miners while sentiment bobs along the lower end of the scale.  This heats up the ante for local Funds and institutions as well as the likes of Sprott, Blackrock, Van Eck et al. which have all been appearing as well.

If only mainstream investors saw the same value and understood what is happening the global financial system.  As an old friend from the banking system (ex-bond trader and structured products) told me the other day the bankers are looking for vehicles to maintain their standard of living and do not have a lot of options.  Yield and preservation of capital are two aims however capital growth is a higher agenda; now that is an interesting story.
The disconnect between the price of gold and the gold stocks has been of intense interest to me over recent years.  Are we finally ready to take this sector for a strong rally?  That is the burning question.  Market leaders on the ASX have done extremely well over the past 12 months and have moved ahead of the rest of the stocks.  Only our heavyweight NCM has lagged in this category disappointing the market and dragging down sentiment.   I have covered reasons for this in my newsletter.

To view the above phenomenon I present a few charts to finish off.  The first chart tracks the ETF in Aussie dollars ASX-GOLD and this is the 5 year picture just to show you what gold is doing in this currency.  All charts in this article come with the compliments of Nick Laird at sharelynx.com

As you see we have a well-defined and continuous uptrend for the A$ price of gold.  The price gets ahead of itself from time to time yet it has been in this trend since mid-2005.  In the top box we have the RSI indicator and I invite you to notice how during each consolidation phase the RSI manages to dip below the 30RSI line in blue.  This is the oversold line.  Government fiscal policies and Central Bank interventions guarantee this trend will continue until they change tack.

The bank demand for bullion is rising and will continue especially after it is officially accepted as a tier one asset under Basel3.  Its rising value will then assist the financial system instead of ringing alarm bells to holding it back will not be a necessary part of monetary policy in the stabilization of the system.   Now what about the Australian gold stocks?

Here is the 10 year picture with NCM a weighted dominant part of this index.  NCM was $3 at the end of 2001 and had risen to $16 by early 2005.  NCM dragged a lagging Australian gold sector – the XGD from 1000 to 3000 over this period.  In mid-2005 the whole gold sector took off for a strong run.
This pushed the XGD index to 5000 by March 2006 with NCM leading the way.  NCM was almost entirely responsible for the strong run from November 2007 to March 2008 as the rest of the sector frustrated investors.

Then the GFC hit with a vengeance pushing the entire sector to panic lows from October to December.  Sentiment was truly decimated and so were the share prices.  Many investors have still not recovered.  I am pointing out the distortion caused by this weighted index because NCM has been underperforming the new leaders of this sector for the last 14 months.  The new leaders were picked up in our Educational Portfolio and which, thanks to the weightings assigned, have allowed us to turn a small profit while the index and NCM suffered.

When you take the NCM weighting out of this index above you will immediately see what I am talking about over the entire 10 year period.  Yet some deeply undervalued stocks are now on our radar in this sector even though another group of new early movers has led the way.  I would expect that, based on the previous experience that these leaders will continue upwards however; the laggards with promise will play catch up and that indicates greater capital leverage to me.

The index above has found very strong support at 6000 and a new up-leg in gold looks like being the catalyst that combine the interested Funds and investment groups to drive this market upwards at last. So here is the dismal unweighted chart which highlights how undervalued this index is when compared to the beautiful uptrend in the Aussie gold price above.
Does this look like an overbought index to you?  The disconnect between this chart and the AUD gold price is pronounced and will have to rebalance at least for a period shortly.  I believe it could be longer and stronger than most investors could believe however this will require a watchful eye in case things turn against us.  Join us at GoldOz if you wish to get educated more on this fantastic opportunity.

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.

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 22nd March 2012.

In our 19th March commentary, we wrote:

“The HUI is probably going to make a short-term bottom within the next three weeks, but speculators who focus on gold and silver stocks should be financially and emotionally prepared for frustrating back-and-forth price action to continue until at least the final quarter of this year.”

The reasoning behind this statement has been covered a number of times in TSI commentaries over the past 9 months, but it is worth reiterating. The first of two main reasons was described as follows in our 30th November 2011 discussion about the Barrons Gold Mining Index (BGMI):

“After the 60s-70s bull market reached the top of a major upward leg (the points labeled 1 and 2 on our BGMI chart), more than 5 years elapsed before there was a decisive break to a new all-time high. If the current market does something similar then there won’t be a decisive break into new all-time-high territory prior to the second quarter of 2013. The point, here, is that the gold sector’s seeming inability over the past 12 months to embark on a powerful new upward trend is consistent with what happened during the previous long-term bull market.”

“…we shouldn’t blindly assume that the current long-term bull market will continue to track the earlier long-term bull market. Real-time analysis is required at each step along the way, because the current market could end up doing better or worse than the earlier one in response to contemporary fundamental developments. We are simply trying to show that the frustration being experienced by today’s holders of gold stocks was most likely also experienced by holders of gold stocks at a similar stage of the 60s-70s bull market. In fact, the level of frustration could have been higher back then because this time around the BGMI was quicker to recoup the losses incurred during its first major correction.”

In our 2102 Yearly Forecast we repeated the above comments and went on to say:

“Real-time analysis will continue to be the primary influence on our expectations, but it makes sense to also keep the 60s-70s pattern in mind. The fact is that despite the important fundamental differences between today’s situation and the situation four decades ago, on a ‘big picture’ basis the current bull market in gold stocks is unfolding in similar fashion to the earlier one.

Perhaps the best way to view the current situation is to accept that while the bull market’s next major upward leg could soon begin, there’s a realistic chance — based on the historical pattern — that it won’t begin until next year.”

The second of the two main reasons relates to the silver market’s spectacular 2010-2011 rally and has also been covered in earlier TSI commentaries. It can be summarised as follows:

After silver completes a parabolic rise that results in a weekly RSI of more than 80 and a Market Vane bullish percentage in the 90s (ideally, 95 or more), the correction low is typically put in place within 8 months of the peak but the overall correction tends to last a minimum of 15 months. To illustrate what we mean, peaks over the past 10 years that meet the aforementioned criteria have been labeled “A” on the following weekly chart. The points labeled “B” on the chart are the correction lows and the points labeled “C” are when we deem the overall ‘corrective’ process to be complete.

The distance from “A” to “C” was 15-17 months during each of the prior corrections of the past 10 years. Given that silver was more ‘overbought’ at its late-April 2011 peak than at any of the preceding three peaks, it is unlikely that the current correction will end up being shorter than the shortest of the preceding episodes. It is more likely to last 17 months or longer. To be more specific, the current correction’s price low was probably put in place during December of last year, but the choppy trading that constitutes ‘corrective activity’ probably won’t be complete before September of this year.

All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

Gold, Stocks and the Euro All Gain in “Risk Asset Recovery” as Positive Manufacturing Data “Confirms China’s Soft Landing”

THE U.S. DOLLAR cost of buying gold climbed to $1750 an ounce Wednesday morning London time – gold’s highest level since early December – while commodity prices also ticked higher and stock markets surged following the release of better-than-expected manufacturing data from several major economies.

Prices for buying silver rallied to $34.01 – though they remained below yesterday’s high.

US Treasury bond prices fell meantime, while the Euro rallied 1.3% against the Dollar.

“Buyers have returned to the Euro, which is helping the situation in gold,” says Ole Hansen, senior manager at Saxo Bank.

“[Gold] had a bit of lackluster profit-taking yesterday but didn’t break anything important on the downside, which helped confirm that being long is back in vogue.”

“I think that going forward, gold is still going to be looking at the US and the Euro zone for direction,” reckons Phillip Futures analyst Ong Yi Ling in Singapore.

The wholesale market price of buying gold in Euros meantime rose to its highest level since September – hitting  €42,864 per kilo (€1333 per ounce) – before dropping ahead of US open.

Based on month-end PM London Fix prices, January saw gold’s biggest calendar month gain in Dollar terms since September 1999. The Dollars-per-ounce price of buying gold was fixed at $1744 yesterday – 13.9% up on the last PM Fix of 2011.

January also marked gold’s best start to a year since 1980, Amanda Cooper at Reuters reports.
Stock markets meantime recorded their best January since 1994, according to Bloomberg, which cites a 5.8% rise for the MSCI All-Country World Index if dividends are included.

“Three things have been behind the recovery in risk assets,” says Mike Ryan, chief investment strategist at UBS Wealth Management Americas in New York.

“Progress on a fiscal compact in Europe, better-than- expected economic data and more accommodative central-bank policies.”

Stock markets gained strongly Wednesday morning too – with the FTSE 100 in London up 1.4% and Germany’s DAX up 2.4% by lunchtime – following news of worldwide manufacturing growth.

China’s manufacturing sector grew in January, according to the official purchasing managers index release, which rose to 50.5 from 50.3 last month (a figure above 50 indicates expansion).

“Today’s data further confirmed a soft-landing story for China,” reckons Ken Peng, economist at BNP Paribas in Beijing.

“However, consumer demand may weaken after holiday effects disappear.”

“New export orders declined,” points out Wei Yao, China economist at Societe Generale.

“Together with a depressed level of backlog orders…the boost in total orders looks temporary, and suggests that manufacturers are not very optimistic about the near-term outlook. Given today’s report, we think year on year export and import growth will prove to be barely positive in January.”

China’s PMI figure “was expansionary, but no so expansionary that we anticipate [monetary] tightening,” says one gold dealer here in London.

“There will be a power transition in Beijing this year,” adds a dealer in Hong Kong.

“I expect maintaining stability at all cost is what this government is going to do.”

Britain’s manufacturing sector also expanded in January, with the PMI coming in at 52.1 – having been below 50 the previous month. Similarly, German manufacturing resumed growth last month, according to its January PMI, which was reported today as 51.0.

Eurozone manufacturing as a whole, however, continued to shrink, albeit at a slower rate, with the PMI rising from 46.9 in December to 48.8 last month.

Similar manufacturing data for the US are released later on Wednesday. The latest ADP Employment Report meantime shows the US added 170,000 private sector jobs in January – down from around 300,000 the previous month. The official nonfarm payrolls data are due to be released by the US Bureau of Labor Statistics on Friday.

Greece’s private sector creditors may be offered a ‘sweetener’ in the form of a bond whose coupon is tied to future economic growth, Bloomberg reports. Negotiations – which Greek finance minister Evangelos Venizelos said yesterday are “one step” from success – stalled last week after parties could not agree on the size of the coupon on new bonds for which existing ones would be swapped.

The government in India – the world’s largest source of demand for buying gold– announced Wednesday it is raising the base import price of gold by 5.7% to $556 per 10 grams. Silver’s base import price will rise 12% to $1067 per kilo. The base import price is the price used to calculate the import duty.

The move follows last month’s switch from discrete to ad valorem taxation, a move which also saw the effective duty on gold almost doubled.

The higher import duties have had a “definite impact” on demand for buying gold in India, according to Harshad Ajmera, proprietor of JJ Gold House in Kolkata.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

The US Fed has changed their definition of a liquidity trap and if anybody can make sense of their document on the subject they are doing extremely well.  In my understanding; if a thesis is not succinct and easily understood it is not worth the paper it is written on.  In my end of year briefing to clients I explained all this and stated that “it quacks, walks and looks like a duck – therefore it is a duck”.  Yes we are in a liquidity trap.  Right now the government sector demand for borrowings is choking off growth and so many B list clients fail to get funding.  The A list gets the cash and the B list doesn’t sending some companies to the wall.  We are seeing more of this now and it will continue in 2012.  Gold stocks that are not funded to production are at increased risk although I have noticed an unsurprising ability for solid gold stocks and even exploration plays to attract adequate funds in this economic environment.

Due to the existence of the liquidity trap and associated economic conditions it seems obvious that low interest rates and various incarnations of QE will need to continue.  Of course the spread paid by lower class borrowers, over and above the Fed rate can grow larger pushing up stress levels for these borrowers.  Continued capital destruction will offset new cash creation which will be soaked up by government demand.  This creates all sorts of challenges and extreme risk of major upheaval, not just default as sovereign borrowing costs soar.

We also have a banking crisis due to sovereign debt exposure in this sector in addition to the deleveraging process itself.  As certain asset values fall loans flip to negative equity.  As the spread on loans increase for SME’s and other clients the debt servicing stretches the business or individuals to the limit.  This is not a good environment for business expansion and jobs growth.

What does this have to do with gold?  Everything.   Gold was sought as a safe haven and will be again.  As upheaval increases the environment for gold improves.  Then you have negative real interest rates.   The interest rates are lower than cost inflation even if many asset prices are falling (deflation).  Inflation for energy and food combines with deflation to create stagflation.  Negative real interest rates are great for gold.

The current stagflation will be met by QE, read that as money printing which will also be needed to fund government debt roll over.  Governments will not unwind this it has to blow up first; this has been the way of history and I see no change due here.

I interviewed an officer of a major London bank who confirmed this ‘distress and deleveraging’ thesis recently.  They are offloading assets and talking clients into allowing same.  They are taking 50%+ haircuts and glad to get this level of return while they can.  Their view on the coming few years is for a protracted period of deleveraging and default.  Other costs are rising, which combines to increase foreclosures and bankruptcies which are still very high and this will continue also.

The Ratings agencies faced a major change to their business model (legal and in effect operational) in 2010 so they are now forced to apply more honest assessments on their own clients and financial products.  This was seen as disruptive, for instance USA down grade from AAA mid last year and the recent threat of a down grade on France and several banks.   However they have no choice so expect this to continue to create ‘news headline volatility’ and reflect risk more appropriately.

There was also serious trouble in the Credit Default Swap markets in 2011 as Greece was classified as a voluntary restructure which the banks decided did not trigger payouts ‘on default’ to bond holders.  This caused bond yields to rise and increased doubt in the inherently risk adverse debt markets.  Debt markets are in a bubble in the stronger economies as capital was hoarded in this asset class for ‘safer’ keeping during 2011.  A major top has been formed or is forming signalling the end of this Bull Run for this asset class.

This no longer remains safe when rates are at record lows – nothing but down side risk for bond holders.  This can create a massive wave of capital and disrupt the debt roll over process forcing monetization of national debt to continue.  This can be classified as QE.  Defaults and haircuts will result in massive capital destruction.  The question is where can the wave of capital go?  We have a banking crisis and therefore bank deposits seen as low risk aren’t what they seem to be.  First tier banks are a safer option, choose carefully and spread savings here and across asset classes.

These bank deposits are nothing more than unsecured loans, in many cases to questionable institutions who have not maintained loan book valuations at realistic market value.  As an asset class real estate requires demand (in a falling price environment?) and supply of loans by banks to flourish.   Yet banks are trying to balance bad debt write offs, rising unemployment / fresh loan defaults , tighter loan qualification measures and the looming Basel3 capital adequacy requirements.  This last measure forces tighter management of reserve ratios and higher reserve levels on this sector; thus restricting their loan book growth and freedom.

Equities may just surprise investors in this environment.  The balance sheets of some corporations and their current earning spread across China and emerging economies make them attractive safer havens.  Earnings multiples are low however caution; research will show you that earnings will also fall for some companies.  Many opportunities exist in emerging markets and the equities in general and this will start the capital flow in this direction once the bottom is found.

Here lies the quandary for 2012; where is the bottom?  The C wave down appears to be a foregone conclusion as deleveraging gathers steam.  The capital requirement for the USA and Europe, just to roll over old debt is staggeringly high.   This sucks capital away from business.

Gold has been correcting after a large rise which failed to stimulate more than the most elite gold stocks in Australia.  Demand for gold and silver in Europe is high and it is growing in China and in many other areas.  Investment demand will soon re-emerge as investors seek a new safer haven other than the USD and US Government or other sovereign Bonds.

For now there is downside risk for gold however this is limited, in part because of the already mature 20% correction.  Gold and silver can both put in major upside this year due to Europe and so can the other white metals on disruption in Africa.  I am following gold short term for clients and decline to make a prediction at this stage.

Europe will falter and if this spreads and becomes disorderly (understatement) then we can see a forceful deleveraging event pushing the metals to short term lows ahead of a resumption of the upward trend.  If this is not as disorderly then gold can trend sideways along the lines of the step up fractal pattern which has characterised the rally since 2001.  The outcome will determine the action on the gold stocks and Australian dollar.